In the News: Auction Rate Securities
(Dec 2010)
Forbes' blogger Bill Singer narrates the story of Grand Circle LLC.
Grand Circle had brokerage accounts at the Royal Bank of Canada (RBC) and Wachovia. Through the recommendation of representatives at RBC and Wachovia, Grand Circle purchased auction rate securities (ARS). For business-related reasons, Grand Circle opened another brokerage account at CCO Investments Services Corp (CCO). Grand Circle's Investment Policy stated that it wanted safe, liquid and AAA rated securities and that...
In the News: Structured Notes
(Oct 2010)
Bloomberg issued a news release today reporting that the amount of sales and issuances of structured products had reached a record in 2010. The demand for higher yields and caution in investing in stock were factors which contributed to the growth in structured products. According to Bloomberg, a popular structured product was the step-up callable note, which is a callable note that increases ('steps up') its fixed rate over time.
This calls for active analysis of the merits of...
In the News: SEC Reviewing Sales of Structured Products
(Sep 2010)
Bloomberg issued a news release today announcing that sales practices of banks and broker-dealers for structured products are being investigated by the Securities and Exchange Commission (SEC) for product overcharging and disclosure of conflicts of interest.
This is not a surprising new release: it is consistent with our findings in our paper on reverse convertibles, 'What TiVo and JP Morgan teach us about Reverse Convertibles.' In this paper, we find that brokerage firms consistently...
In the News: Equity-Indexed Annuities
(Aug 2010)
An annuity makes periodic payments to the holder of the annuity. Fixed annuities make fixed payments and variable annuities make variable payments. Equity-indexed annuities (EIAs) are similar to both fixed and variable annuities in that they pay an interest rate linked to an equity index and guarantee a minimum interest rate. EIAs are especially marketed to retirees by the insurance industry.
Forbes published an article on EIAs. The article evaluates the claims made by typical marketers...
In the News: Structured Notes
(Aug 2010)
Structured Notes Are Wall Street's `Next Bubble,' Whalen Says
Bloomberg issued a news release today discussing the topic of a structured products bubble in Wall Street. According Christopher Whalen, managing director of Institutional Risk Analytics, the sale of structured products allows the selling firms to make bets on interest rates. Furthermore, they are illiquid products for which firms are not obligated to make markets and hence provide liquidity when these products might need them...
In the News: Equity Indexed Annuities
(May 2010)
Forbes published an article on equity-indexed annuities (EIAs). It describes the history of and market for EIAs, compares EIAs with other fixed and variable annuities, and briefly weighs the advantages and disadvantages of EIAs.
An annuity makes periodic payments to the holder of the annuity. There are fixed annuities that make fixed payments and variable annuities that make variable payments. EIAs are similar to both fixed and variable annuities in that they pay an interest rate linked...
Reverse Convertibles tied to TiVo Stock
(May 2010)
J. P. Morgan's 64% Note Tied to TiVo Stock Shows Risks of Reverse Convertibles
Bloomberg issued a news release reporting on the reverse convertible, a structured product, on TiVo.
A reverse convertible note is a type of structured product that is linked to an equity security or an index. It is a short-term note that pays a relatively high coupon rate compared to traditional notes. The returns of the note at maturity depends on whether the equity, called 'reference asset', falls below a...
Registered Rep.: A Tempest Over Structured Products
(Feb 2007)
A Tempest Over Structured Products
Registered Rep. issued a news release today reporting on the state of the structured products market. The sale of structured products has grown by an estimate of 33% from 2005 to 2006. Yet the general features of structured products seem to make these products unattractive: complex, expensive, and illiquid. Financial advisors might favor structured products for it enables portfolio diversification and for its ability to tailor to the specific needs of...
Forbes: Guaranteed to Go Up
(Nov 2006)
Guaranteed to Go Up
Forbes published an article examining structured products sold to retail investors around the world. It describes how a structured product works, the payoffs and risks, using an example of the principal protected note. It then explains how the principal protected note is equivalent to and can be replicated by a combination of traditional securities and derivatives.
A principal protected note returns at least the face value of the note at maturity. If the reference...
