Bond Valuation and Structuring

Life Without Advance Refunding

Municipal Finance Journal, Vol Volume 39 Number 03, Fall 2018

The elimination of advance refunding following the signing of the Tax Cuts and Jobs Act in December 2017 will have significant effects on the municipal market. In recent years, most municipal bonds aimed at institutional investors carried an above-market 5% coupon and had a 10-year call. The 5% NC-10 structure had wide appeal for a variety of reasons, a primary one being the bonds' eligibility for advance refunding. In the absence of advance refunding, the 5% NC-10 structure will lose much of its appeal.


Creating a Live Yield Curve in the Illiquid Muni Market

Journal of Fixed Income (Summer 2017)

After-Tax Portfolio Value: The Missing Tax Option

Journal Of Investment Management, Vol. 14, No. 4, (2016), pp. 1–10

After-tax performance measurement requires a rigorous definition of after-tax portfolio value, which is also a prerequisite for effective portfolio management.

Optimal Municipal Bond Portfolios For Dynamic Tax Management

Journal Of Investment Management, Vol. 14, No. 1, (2016), pp. 81-99

With Estate Puts, Beauty Is in the Eye of the Beholder
CFA Institute: Private Wealth Management Newsletter (August 2009)

A bond with an estate put (or survivor’s option) can be redeemed at face value by the holder’s heirs if the holder dies — an attractive feature to investors with a short life expectancy. How should an investor value such options?

Related Analytics: Retail Bond Analyzer™

What Makes the Municipal Yield Curve Rise?
The Journal of Fixed Income (Winter 2008)

The municipal yield curve’s permanent upward slope is a logical consequence of that curve being comprised of bonds callable at or close to par after 10 years. Previous researchers have overlooked this simple, straightforward explanation.

Callable Bonds: Better Value Than Advertised?
Journal of Applied Corporate Finance (Summer 2008)

On an after-tax basis, callable bonds can be a good deal for both issuer and investor.

When It’s Time to Get off the Tree
Financial Engineering News (November/December 2006)

Options embedded in mortgage loans and callable bonds often get exercised either too early or too late. Longer lockout periods or European-style call options can help debt managers minimize the potential damage from suboptimal exercise.

Some Bonds Are Worth More Dead than Alive
Financial Engineering News (September/October 2006)

For an issuer, the choice between an institutional bond offering and a similar-maturity retail deal with an “estate put” presents special challenges.

What’s Bad About Yield-to-Worst
Leverage World (August 15 2003)

While yield to worst gives a better indication of a callable bond’s relative value than either yield to maturity or yield to call, it is still unsatisfactory. Option-adjusted spread (OAS) is a superior approach.

Taking the Friction out of Saving Interest
 BondWeek (July 14 2003)

The ratchet bond (an Andrew Kalotay Associates innovation) is a convenient, cost-effective surrogate for a callable bond, which achieves interest savings from declining interest rates without ongoing transaction cost.

Insuring Callable Bonds: Selecting the Right Payment Plan
The Journal of Risk Finance (Spring 2003)

An option valuation framework lets callable bond issuers meaningfully compare the cost of bond insurance purchased through periodic payments over the bond’s life, versus paying a single up-front premium.

Ratchet Bonds: Maximum Refunding Efficiency at Minimum Transaction Cost
Journal of Applied Corporate Finance (Spring 1999)

The ratchet bond structure, whose indexed coupon resets periodically only when rates fall, represents a superior alternative to callable bonds. Because it automatically lowers interest payments when rates decline, the inefficiencies and transaction costs associated with calling and refunding are eliminated.

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.

The Problem with Black, Scholes et al.
Derivatives Strategy (November 1995)

One-factor interest rate models are only reliable for pricing relatively simple instruments whose value depends exclusively on interest-rate movements. The models have serious limitations when used to price even moderately complex instruments such as convertible bonds and spread options.

The Perils of Monte Carlo
Derivatives Strategy (June 1994)

The average values that Monte Carlo models produce are imprecise, and the results they provide can differ significantly. For instruments with complex optionality, such as callable bonds, cancelable swaps and path-dependent securities, recursive models (which start the evaluation process at maturity and work backwards) produce more precise and generally superior valuations.

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.

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.

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 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.

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.

An Analysis of Original Issue Discount Bonds
Financial Management (Autumn 1984)

Zero-coupon and other bonds issued at a discount first appeared in 1981. Comprehending OID bonds requires understanding how taxes, interest rate risk, and call and sinking fund provisions influence their value differently than traditional par bonds.

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