When yields on risky bonds decline toward those on safe assets, it is fair to conclude, he argues, that someone is taking on excessive risk. The problem, then, is how to determine exactly when risk premiums are too low.

When financial markets discovered that supposedly riskless government bonds might be forced into default, they raised risk premiums dramatically. This rendered potentially insolvent commercial banks, whose balance sheets were loaded with such bonds, giving rise to Europe s twin sovereign debt and banking crisis.

The bonds can be sold to a worldwide market by insurance companies that incur major risks by writing policies. If the insurance companies can get a good enough price for such bonds, they can eliminate their exposure to the risk of a major disaster, thereby allowing them to issue policies to homeowners at a lower cost.

Sierra Leone would issue iron ore bonds and Mongolia would issue copper bonds. Investors would be able to buy Guatemala s coffee bonds, Côte d Ivoire s cocoa bonds, Liberia s rubber bonds, Mali s cotton bonds, and Ghana s gold bonds.

Jamaica, for example, would issue aluminum bonds Nigeria would issue oil bonds Sierra Leone would issue iron ore bonds and Mongolia would issue copper bonds. Investors would be able to buy Guatemala s coffee bonds, Côte d Ivoire s cocoa bonds, Liberia s rubber bonds, Mali s cotton bonds, and Ghana s gold bonds.

How much government debt is too much is an open question, because tolerance for public debt is highly dependent on prevailing perceptions. The risk premium attached to the interest rate is the critical variable once it starts rising, the existing rate of deficit financing becomes unsustainable.

The advantage of a par bond is that Greece s creditors banks, insurance companies, and pension funds would be able and allowed to continue valuing their Greek bonds at 100 cents on the euro, thereby avoiding massive losses on their balance sheets. That, in turn, would sharply contain the risk of financial contagion.

Tensions in financial markets have hit new highs. Most telling is that Britain, which retained control of its currency, enjoys the lowest yields in its history, while the risk premium on Spanish bonds is at a new high.

We do not know how to handle the fiscal issues posed by the financial crisis. Doubts about the sustainability of government debt produce sudden surges in interest rates, as risk premia rise dramatically with perceptions of the likelihood of default.

Moreover, if Italians held all Italian public debt, any increase in the risk premium would be less burdensome. Even if the risk premium doubled, to 500 basis points, the Italian government s debt service costs would rise, but the money would be paid to Italian investors (whose higher incomes could then be taxed away).

It may therefore be tempting to invest in inflation indexed bonds, which adjust both principal and interest payments to offset the effects of changes in price growth. But the protection against inflation does not prevent a loss of value if real interest rates rise, depressing the value of the bonds.

The decline in government bond prices has exposed the banks undercapitalization, while the prospect that governments will have to finance banks recapitalization has driven up risk premiums on government bonds. Facing the prospect of having to raise additional capital at a time when their shares are selling at a fraction of book value, banks have a powerful incentive to reduce their balance sheets by withdrawing credit lines and shrinking their loan portfolios.

With the risk premium at current levels, there is a real danger that Greece may not be able to extricate itself from its predicament, regardless of what it does, because further budget cuts would further depress economic activity, reducing tax revenues and worsening the debt to GDP ratio. Given that danger, the risk premium will not revert to its previous level in the absence of outside assistance.

In the coming years, emerging markets will most likely struggle with implementation of global financial regulatory standards, which apply mostly to more sophisticated financial markets. They will also confront a rapidly changing external environment and a growing need to manage capital flows more effectively, which will require much closer coordination between central banks and financial regulators.

Now, the CDS market offers a convenient way of shorting bonds, but the risk reward asymmetry works in the opposite way. Shorting bonds by purchasing a CDS contract carries limited risk but almost unlimited profit potential, whereas selling a CDS contract offers limited profits but practically unlimited risks.

One example is Eurobonds, which Merkel has declared taboo. Yet they are the obvious solution to the root cause of the euro crisis, which is that joining the euro exposed member countries government bonds to the risk of default.

45. The rescue is notable in that there was no attempt to restructure the debt profile, probably because debt was largely in the form of bonds that had been widely dispersed among portfolio investors. It would have been extremely difficult to locate the creditors and to organize a mechanism through which restructuring could be negotiated, and the free rider problems would have been uncontrollable.

The introduction of the euro was supposed to reinforce convergence in fact, it created divergences, with widely different levels of indebtedness and competitiveness separating the member countries. If heavily indebted countries have to pay heavy risk premiums, their debt becomes unsustainable.

Banks loaded up on the relatively high yield debt of countries like Greece because they had to set aside very little capital. But, while the debt was highly rated, how could anyone objectively assess unsecured and virtually unenforceable obligations?

Moreover, in a risk off environment, when investors are risk averse or when equities and other risky assets are subject to market and or credit uncertainty, it may be better to hold negative yielding bonds than riskier and more volatile assets.

If the credit risks of the debtor and the corresponding risk agios have undergone any change after the issuance of the liability instrument, the current prices or interest rates of similar liability instruments shall be referred to and the adjustment to the differences between different financial instruments shall be taken into consideration in the determination of the fair value of the liability instrument.

Also, national governments, acting alone, could take steps to increase the flows of finance for development, for example by launching a premium bond dedicated to development funding.

(2)Where an enterprise holds the assets or liabilities that can be used to counteract the market risks, it may adopt the middle price of the market to determine the fair value of the positions that can counteract the risks of the market meanwhile, the offer or charge shall be the basis for determining the fair value of net exposure.

We can also add to these financial risks the massive problems of bond insurers that guaranteed many of the risky securitization products such as CDOs. A very likely downgrade of these insurers credit ratings will force banks and financial institutions that hold these risky assets to write them down, adding another 150 billion to the financial system s mounting losses.

Where the credit risks of the debtor and the applicable credit risk agios remain unchanged after the issuance of the liability instrument, the benchmark interest rate may be adopted to estimate the interest rate of the current market so as to determine the fair value of the liability instrument.

The transaction expenses include handing charges and commissions as well as other necessary expenditures an enterprise pays to its agency institutions, consultation companies, securities dealers and etc., but exclude the bond premiums, reduced values, financing expenses, internal management costs, and other expenses that are not directly related to the transaction.

Moreover, the new federal bonds very long maturities meant that there was no rollover risk. It would have been very dangerous to expose the federal government to this danger, given that the operation was rightly perceived at the outset as extremely risky.

1 women apos s consumption portfolio for 129,076 bonds, consolidated to March 1995

The slow launch of longevity bonds ultimately reflects a fundamental question can we genuinely reduce the impact of longevity risk? If everyone is affected by longevity risk in the same way, then no matter what the price of a longevity bond, everyone should logically want to be on the same side of the contracts all buyers at one price, all issuers at another.

Investors are buying long term bonds at the current low interest rates because the interest rate on short term investments is now close to zero. In other words, buyers are getting an additional 2 current yield in exchange for assuming the risk of holding long term bonds.

In response, central banks should purchase government bonds for cash in as large a quantity as needed to push their prices up as high as possible. Expensive government bonds will shift demand to mortgage or corporate bonds, pushing up their prices.

Cat bonds have been growing in importance in recent years. According to estimates by Lane Financial, there were 1.8 billion worth of cat bonds issued in the year April 2004 March 2005.

As Edgar L. Smith wrote in The Atlantic Monthly back in 1924, when the principal risks are macroeconomic, bonds are no safer than diversified portfolios of stocks in fact, they are riskier.

DAVOS The measures introduced by the European Central Bank last December, especially the Long Term Refinancing Operation (LTRO), have relieved the liquidity problems of European banks, but have not cured the financing disadvantage of the highly indebted member states. Since high risk premiums on government bonds endanger the capital adequacy of banks, half a solution is not enough.

First, sovereign bonds held by banks are treated as risk free assets under EU rules for calculating banks solvency and capital adequacy levels. This is a risky assumption, because it implies that no European government will ever fail to repay the bond in full, with all interest due, and on time.

The measures introduced by the ECB went a long way toward relieving banks liquidity problems, but nothing was done to reduce the large risk premiums on government bonds. Because the premiums are intimately interconnected with the banks capital deficiencies, half a solution is not good enough.

Local bond markets provide alternative sources of financing for companies and Governments, which avoid exchange rate risks inherent to foreign financing.

3. If you still find yourself there, stop the desire to deleverage by having the Treasury guarantee risky assets, or issue safe ones, in order to raise the quality of debt in the market this, too, will make holding debt more attractive.

If you still find yourself there, stop the desire to deleverage by having the Treasury guarantee risky assets, or issue safe ones, in order to raise the quality of debt in the market this, too, will make holding debt more attractive.

The European authorities accepted a plan that would reduce the deficit gradually, but the markets were not reassured. The risk premium on Greek government bonds continues to hover around three percentage points, depriving Greece of much of the benefit of euro membership namely, being able to refinance government bonds at the official discount rate.

As a result, mortgage brokers maximize their income by generating larger volumes of mortgages, as do the banks that package these loans into mortgage backed securities (MBS s). Investment banks then earn fees for re packaging these securities in tranches of collateralized debt obligations, or CDO s (and sometimes into CDO s of CDO s).

41. In measuring an environmental liability based on the present value approach, the discount rate used to measure present value would be a risk free rate, such as that used for a government security that has a similar term.

If there is 120 of collateral guaranteeing a 100 bond, the bond is safer, no doubt. How much safer, however, depends upon the returns on the pool of bonds that compose the CDO.

The stock market s recent performance often is attributed to the unconventional monetary policies that many central banks have been pursuing. These policies, by design, lowered the return on sovereign bonds, forcing investors to seek yield in markets for higher risk assets like equities, lower rated bonds, and foreign securities.

Bond holders are to receive 456 million in bonds due in 2011 (with the same coupon of 9.5 per cent) and 574 million in bonds due in 2018 (with the same coupon of 9.04 per cent).