Make money neat from a few toads and from money again whenever one uses money, it takes the decision on the possible investment toads on the basis of the emission report available to him. The terms and conditions are so complex that they are not suitable as a basis for decision making. In the times of financial engineering you should not rely on credit rating agencies. In addition to the risk of the issuer, the holders of securities has the risk set out in the terms of the bonds to carry. Shown in the following example. We decided in one or the other structured bonds (with a b rating) to put his money.
(S & P estimates the probability of non-payment as follows: AAA 0.094%, AA 0.125%, A-0.304%, BBB 0.978%, BB B 9.432%, 5%, etc.) The nominal value of both securitised loans is E.g. 1,000. The two are due in a year. The standard interest rate should be 5%. In the case of the bonds have a current value (EUR 1000/1.05) Euro 952.40. If the bonds carry a rating of B (i.e.
the probability of non-payment would be 5%), then the expected refund is 950.00 and the present value (EUR 950/1.05) euros 904.76. After many investors are willing to buy only the A – rated bonds (E.g. due to regulatory capital), the issuer can opt for a combination of both bonds. So issued the bonds in the following tranches for different terms. If the X or Y is charged, then the bond holder gets his money (tranche A) when pays the X and Y, then the bond holder gets his money (tranche B) if payments are independent, then the probability of payment of the instalment is A 99.75% (1-(1-0.95)*(1-0.95)). And so bonds will be made from two BB rated borrowers A Gera tete bond. (The events are usually interdependent and the rating agencies not considering that!) The tranche B is only with CCC + guessed. The probability of payment is 90.25% (0.95 * 0.95). The expected yield is but (if purchased for the fair price of euro (1,000/1.05) * 90.25%=Euro 859.52) 1.05 / 90.25% – 1 = 16.3%. And for the price, those buyers are willing to buy, who are looking for a yield mark-up within the same rating class (E.g. the Bank has reached their goal with the relief of the balance sheet, because the loans must be backed with equity). However, if the issuer no market, he takes the CCC + bonds claim and divided again in tranches, the yield-hungry investors to satisfy and to extend its financing capabilities.