Bond Valuation and Structuring

The Challenge of Managing Credit Spreads: New Tools on the Horizon

Journal of Applied Corporate Finance (Fall 1999)

While corporate credit spreads vary just as underlying Treasury yields do, they are harder for corporate treasurers and other market participants to hedge against. Standard & Poor’s credit indices derived from market prices of selected liquid bonds offered a means to revolutionize the mangement of credit spreads.

Everything You Always Wanted to Know About Ratchet Bonds

BondWeek (July 13 1998)

The Tennessee Valley Authority’s putable automatic rate-reset securities (PARRS) issued in 1998 were the first-ever ratchet bonds – a revolutionary structure that captures virtually all the advantages of conventional bonds for both borrowers and investors, while eliminating the disadvantages. Andrew Kalotay first proposed the ratchet bond concept to TVA and worked with the agency to structure the PARRS security.

Mickey Mouse Analysis

F&T Risk Advisor (December 1993)

The reams of misconceived media commentary inspired by Walt Disney Co.’s sale of a 100-year bond in 1993 were like cartoon punches, full of exclamation points but lacking real power.

How to Succeed in Derivatives without Really Buying

Journal of Applied Corporate Finance (Fall 1993)

Understanding the derivatives market can help a treasurer distinguish between good and bad pricing in the cash market. By using a synthetic benchmark for comparison, Andrew Kalotay Associates persuaded Niagara Mohawk to reject a seemingly attractive refunding transaction that would have squandered roughly $1.5 million in potential cash savings.

A Model for Valuing Bonds and Embedded Options

Financial Analysts Journal (May/June 1993)

This seminal article explains in concrete detail and in layman’s terms how to compute a fair value for any bond, including callables and other structures with one or more embedded options. The technique requires building a binomial interest rate tree that models the evolution of interest rates and the yield curve.

The Management of Sinking Funds: The World Bank Experience

Journal of Fixed Income (June 1993)

An illustration of the complexities and challenges of sinking fund management, showing the power of the refunding efficiency concept.

The Sure Thing – Bond Refunding: How Operations Research Made Its Mark on Wall Street

OR/MS Today (April 1993)

How Bell System treasurers came to embrace Dr. Kalotay’s idea of refunding efficiency.

Sinking Fund Prepurchases and the Designation Option

Financial Management (Winter 1992)

Issuers of bonds with sinking fund provisions may reduce borrowing costs by purchasing and retiring portions of their own outstanding bond issues before maturity through “designation” options. This paper develops elements of an issuer’s optimal strategy for sinking fund prepurchases, designations and calls.

The Valuation and Management of Bonds with Sinking Fund Provisions

Financial Analysts Journal (March/April 1992)

Sinking fund bonds incorporate interrelated options whose value is affected by market purchases on the part of either the issuer or investors. Valuation methods described in this paper lead to concrete guidance for investors to maximize the value of their bonds, and for issuers to optimize benefits from the various options they possess.

Embedded Call Options and Refunding Efficiency

Advances in Futures and Options Research (Vol. 3, 1988)

A bond should be called when the company’s refunding rate is below a specified target rate determined by interest rate volatility plus several factors whose combined impact is captured in a single percentage figure known as refunding “efficiency.” This paper explains how to compute refunding efficiency and the target refunding rate.
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