Bond pricing and leveraged bond questions

Discussion in 'Economics' started by HezBallah, Sep 10, 2013.

  1. So I'm trying to understand bond pricing and leveraged bonds. Could you help me a few questions?

    1) When rates go up, how do bond prices go down? What's the mechanism here? If rates go up... I guess existing bond prices go down because they are only paying the older, lower rate? So if a bond is paying a 5% yield on $100 par value, and say then rates go up to 10%, the par value of the bond has to go down to $50 to match. Is that kind of how it works? Schools always teach "rates up, prices down".. but I never understood the mechanism involved.

    2) What is a syndicated leveraged bond?

    3) In this passage:
    "How are Loans Syndicated?

    Once the loan issuer (borrower) picks an arranging bank or banks and settles on a structure of the deal, the syndications process moves to the next phase. The “retail” market for a syndicated loan consists of banks and, in the case of leveraged transactions, finance companies and institutional investors such as mutual funds, structured finance vehicles and hedge funds (more on that in section 5).

    Before formally offering a loan to these retail accounts, arrangers will often read the market by informally polling select investors to gauge appetite for the credit.

    Based on these discussions, the arranger will launch the credit at a spread and fee it believes will “clear” the market.

    Until 1998, this would have been all there is to it. Once the pricing was set, it was set, except in the most extreme cases. If the loan were undersubscribed – if investor interest in the loan was less than the amount arrangers were looking to syndicate – the arrangers could very well be left above their desired hold level."

    What is a hold level? What is an issue and hold bond in regards to the bank?
  2. First of all, you should read some basic books about bonds.

    As to your questions:
    1) Sort of, bond prices go down when rates go up, because you have to discount the future coupons that you're going to receive at a higher rate. It's about the higher opportunity cost of money.

    2) I am pretty sure there's no such thing as a "syndicated leveraged bond". You might be referring to a "syndicated leveraged loan", which is a little different.
  3. Bonds pay coupons, not yields. Yield is performance to maturity. Maybe this is confusing you. The yield is the rate you get to maturity provided all coupons are reinvested at that rate. Kind of tricky. Get one of the introductory books by F. Fabozzi.