tailieunhanh - Structured bonds and greek demons is the attack ”fair”?

The severe political turmoil provoked by an allegedly mispriced private bond issue in Greece added to the controversial matter of whether prices of structured bonds sold to investors are ”fair” or not. In this paper structured bond market is analysed with particular focus on valuation issues. It is argued that in practice prices are subjective, there is not a unique price that a structured bond should be transacted and model prices are in general irrelevant to the investor unless he has access to the underlying swap market. Consequently, the notion ”overpricing” (conventionally defined as the difference between model and transacted price) is misleading. | Journal of Applied Finance Banking 2011 231-277 ISSN 1792-6580 print version 1792-6599 online International Scientific Press 2011 Structured Bonds and Greek Demons Is the attack fair Konstantinos Kiriakopoulos1 and Theodoros Mavralexakis2 Abstract The severe political turmoil provoked by an allegedly mispriced private bond issue in Greece added to the controversial matter of whether prices of structured bonds sold to investors are fair or not. In this paper structured bond market is analysed with particular focus on valuation issues. It is argued that in practice prices are subjective there is not a unique price that a structured bond should be transacted and model prices are in general irrelevant to the investor unless he has access to the underlying swap market. Consequently the notion overpricing conventionally defined as the difference between model and transacted price is misleading. Boundaries for prices as seen by investors and issuers are constructed under a set of simplified assumptions. Issue price is the recommended price that a structured bond should be offered in the primary market and in most cases differs from model price. Competition among issuers should minimize the difference between them. The analysis of the market in Greece has revealed investors preferences to capital guaranteed interest rate linked bonds with mild structuring. Despite popular belief overpricing was soft with the absence of the usual 1 Capital Markets Proton Bank 14245 Eslin and Amaliados 20 Athens Greece e-mail kkiriakopoulos@ Department of Regional Economic Development University of Central Greece 32100 Leibadia Greece e-mail k_kiriak@ 2 Risk Management Proton Bank 14245 Eslin and Amaliados 20 Athens Greece e-mail Article Info Revised September 12 2011. Published online September 30 2011 232 Structured Bonds . marketing pitfalls that happened elsewhere. Exception were the Tier I structured bonds issued by local banks. JEL