On the Fritz
Adding value for issuers—and taking it away from investors
For an underwriter, it’s an admission of failure to tell an issuer, “I got you a fair rate on your bonds.” If the investment bankers merely obtain the market clearing price, how can they claim to have added value? Their challenge is to enable the client to borrow at less than its appropriate risk-adjusted rate, without breaking any securities laws.
In this context, embedded options are a godsend, helpfully muddying the valuation process and potentially enabling issuers to get the better of
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