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Reaching for yield, which we define as an investor preference for higher-yield bonds at a given rating or for higher-rated bonds at given yields, is associated with inflated valuation and thus negatively predicts risk-adjusted returns. Controlling for ratings, alphas are lower for higher-yield bonds, whereas, controlling for yields, alphas are lower for safer-looking, higher-rated bonds. Future bond returns are particularly low when current interest rates are low and demand from yield-reaching investors increases. These bonds experience more frequent downgrades and defaults, suggesting that they are riskier despite their high valuation. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The e-companion and data are available at https://doi.org/10.1287/mnsc.2023.4920. [ABSTRACT FROM AUTHOR]

Interest rates have risen rapidly in many advanced economies over the last two years, leading to a monetary squeeze. The impact of this squeeze varies across countries due to factors such as private debt levels, the distribution of debt, and the average maturity of fixed rate debt. The UK, Italy, and Germany are expected to be the hardest hit economies, while Korea and Japan will be the least affected. Other indicators of the monetary squeeze include money and credit growth, changes in bank credit standards, quantitative tightening, and property price changes. Overall, the findings suggest downside risks to growth in Italy, Spain, and Australia, while supporting positive GDP forecasts for Korea and Japan. [Extracted from the article]

This study addresses interest rate sensitivity of emerging market corporate debt. Previous research suggests that interest rate sensitivity of corporate bonds depends on residual maturity of issues, creditworthiness of issuers, embedded options and other idiosyncratic factors. However, the dependence of interest rate sensitivity on phases of the business cycle has not received an appropriate academic attention. This paper provides empirical evidence and theoretical interpretation of a dichotomy of interest rate sensitivity across the phases of the cycle, and sheds light on how credit spreads respond to interest rates. The historical span of the research covers the period of 2004–2016. The findings imply that hedging interest rate risk ought to be a dynamic process and take into consideration where the economy is positioned in the current business cycle. This research provides important insights on the nature of interest rate sensitivity, capable of enhancing financial stability and improving efficiency of financial system. [ABSTRACT FROM AUTHOR]

This study investigates the role of public debt financing in shaping accounting conservatism in privately held companies. We focus on the change in conservatism of private firms following initial issuance of public debt and examine the effects of agency conflicts between bondholders and shareholders on the change in conservatism. Regression analyses on a large sample of public bond issues by Korean private firms reveal the following: First, private firms with public debt exhibit a higher degree of conservatism than those with exclusively private debt. The incremental effect of public debt on the level of conservatism is virtually equivalent in magnitude to that of public equity. Second, and more importantly, private firms that issue public debt for the first time show a significant increase in conservatism, whereas corresponding public firms do not. Third, private firms with high agency costs of public debt (characterized by high-information asymmetry and high credit risk) undergo a greater increase in conservatism following their initial bond issues than those with low agency costs. Further analysis shows that private firms sustain increased levels of conservatism even beyond the time period of average maturity of initial bonds and that bond investors reward this long-term commitment to conservative accounting by gradually reducing interest rates for seasoned bond issuers. The findings of this study shed light on how information demand arising from public debt issuance, especially by private firms with high ex ante agency costs, engenders conservative financial reporting in emerging markets. [ABSTRACT FROM AUTHOR]

Copyright of Research Papers of the Wroclaw University of Economics / Prace Naukowe Uniwersytetu Ekonomicznego we Wroclawiu is the property of Uniwersytet Ekonomiczny we Wroclawiu and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

While the research linking interest rates to government deficits is extensive, the impact of other tax-related variables is uncommon. This study seeks to add to the literature on credit markets by exploring the impact of not only the budget deficit but also average effective personal income tax rates and personal income tax evasion as explanatory variables. To the best of our knowledge this study is the first study to recognize the joint importance of all of these fiscal variables. We utilize data covering the post-Bretton Woods period from 1971 through 2016 to analyze the impact of the three variables in order to shed light on the spread between the real interest rate yields on Moody's Aaa-rated corporate bonds and high quality municipal bonds. Estimations reveal that the higher the average effective federal personal income tax rate, the greater the differential between the yields on corporate bonds and tax-free Municipals. Furthermore, it is found that the higher the adjusted gross income gap, the greater the real yield spread between Moody's Aaa-rated corporate bonds and high quality municipal bonds. Finally, the greater the primary budget deficit, the greater the spread as well. [ABSTRACT FROM AUTHOR]

What drives the compensation demanded by investors in risky bonds? Longstaff and Schwartz (1995) predict that one key factor is the time-varying negative correlation between interest rates and the yield spreads on corporate bonds. However, the effects of callability and taxes also need to be considered in empirical analyses. Canadian bonds have no tax effects, yet, after controlling for callability, the correlation between riskless interest rates and corporate bond spreads remains negligible. Our results provide support for reduced-form models that explicitly define a default hazard process and untie the relation between the firm's asset value and default probability. [ABSTRACT FROM AUTHOR]

Because the option to call a corporate bond should rise in value when bond yields fall, the relation between noncallable Treasury yields and spreads of corporate bond yields over Treasury yields should depend on the callability of the corporate bond. I confirm this hypothesis for investment-grade corporate bonds. Although yield spreads on both callable and noncallable corporate bonds fall when Treasury yields rise, this relation is much stronger for callable bonds. This result has important implications for interpreting the behavior of yields on commonly used corporate bond indexes, which are composed primarily of callable bonds. [ABSTRACT FROM AUTHOR]

This study focuses on the consensus forecasts from the Survey of Professional Forecasters (SPF) for 1993–2017. These include the SPF forecasts of US 10-year Treasury rate (TBR), Moody's Aaa corporate bond rate (Aaa), CPI inflation, and real GDP growth. We show that both SPF and random walk forecasts of TBR and Aaa generally fail to be orthogonal to changes in SPF inflation (but not growth) forecasts. Such findings point to the potential usefulness of SPF inflation forecasts in improving the accuracy of SPF and random walk forecasts of TBR and Aaa. Further results indicate that changes in SPF inflation forecasts accurately predict directional change in both TBR and Aaa at longer forecast horizons for 2008–2017 (but not for 1993–2007). These latter results raise the question of whether long-term interest rates have become easier to predict, which deserves subsequent research. [ABSTRACT FROM AUTHOR]

In this paper, we consider a new corporate bond-pricing model with credit-rating migration risks and a stochastic interest rate. In the new model, the criterion for rating change is based on a predetermined ratio of the corporation's total asset and debt. Moreover, the rating changes are allowed to happen a finite number of times during the life-span of the bond. The volatility of a corporate bond price may have a jump when a credit rating for the bond is changed. Moreover, the volatility of the bond is also assumed to depend on the interest rate. This new model improves the previous existing bond models in which the rating change is only allowed to occur once with an interest-dependent volatility or multi-ratings with constant interest rate. By using a Feynman-Kac formula, we obtain a free boundary problem. Global existence and uniqueness are established when the interest rate follows a Vasicek's stochastic process. Calibration of the model parameters and some numerical calculations are shown. [ABSTRACT FROM AUTHOR]

This paper investigates the risk structure of interest rates using pure discount bonds. The most striking feature of our estimates of default-risk premia is the resemblance of their time profile to the theoretical time profile obtained by Merton (1974). [ABSTRACT FROM AUTHOR]

This paper empirically investigates a contingent-claims model of commercial mortgage pricing. We find that the magnitude of the observed default premia for a sample of nonprepayable fixed rate bullet mortgages can be explained by the contingent-claims model. In addition, the model explains a significant proportion of the period-to-period changes in the default premia. However, given an assumed negative correlation between building value changes and interest rate changes, the model's risk structure tends to increase less steeply with increasing maturity than the observed risk structure. [ABSTRACT FROM AUTHOR]

This paper analyzes the emergence of the inflation premium in long-term interest rates as the explicit result of borrowers' and lenders' behavior in the bond market in response to expectations' of price inflation. By exploiting a structural modelling approach, this analysis seeks not only to estimate the magnitude of the inflation premium due to this portfolio behavior but also to identify the (in general differential) contributions to it of borrowers' and lenders' behavior. To anticipate, the empirical results suggest that the equilibrium portfolio responses to a marginal 1% of expected price inflation change the nominal long-term interest rate by about 2⁄3%, and that this premium reflects approximately equal responses by borrowers and lenders. [ABSTRACT FROM AUTHOR]

Theory suggests that two bonds which are comparable in all respects should offer investors the same yield. However, the yields of new corporate bonds often differ substantially from almost identical seasoned (outstanding) bonds. The most extensive work investigating this difference in yields between new and seasoned bonds (yield spread) was done by Conard and Frankena (3). Their primary finding was that differences in coupon rates between new and seasoned bonds of equal quality (Aa Public Utility) accounted for about one-half the yield spread. Because of this finding, equal quality new and seasoned bonds with the same coupon rates are used in the present study. [ABSTRACT FROM AUTHOR]

This paper presents more detailed evidence on the behavior and relationships of various interest rates in the United States since the Accord of March, 1951. Spectral analytic techniques are utilized in examining (1) how rates of return on different securities of specific maturity vary through time, and (2) how rates on securities with different terms to maturity appear to be related. Spectral analysis appears especially well suited to examination of interest rate relationships since it is a mathematical tool equipped to deal specifically with the mixture of randomness and regularity typically contained in an interest rate series. As such, it yields more insights into interest rate movements and relationships than conventional techniques of analysis which depend on specified periodicities. [ABSTRACT FROM AUTHOR]

The article provides an outlook for the corporate bond market. It is explained that the outlook for the corporate bond market cannot be viewed apart from other sectors of the capital market. The article cites the year 1959, when the net corporate bond financing dropped almost 30 per cent and corporate bond yields rose, which indicates the danger of segmental analyses of the capital market. Therefore, the assignment of the outlook for the corporate bond market means the outlook for interest rates, with a focus on the influence of the corporate sector.

Copyright of Archives of Mining Sciences is the property of Polish Academy of Sciences and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)