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.

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.

Tax Differentials and Callable Bonds

Journal of Finance (September 1979)

When a borrower has a higher tax rate than the lender; on an after-tax basis both parties benefit from a callable bond compared with either a noncallable or putable one. Because corporations are taxable and major lenders such as pension funds are not, this explains the prevalence of callable corporate bonds and the rarity of putable bonds.
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