Professional Guide to PayDay Loans

As mentioned before, from an active portfolio manager’s perspective a major concern is migration risk. Investors who do not hold a bond until maturity have to be compensated for a possible deterioration in credit quality, a potentially resulting downgrade and increased volatility. This becomes even more important if the downgrade triggers investment restrictions. For a specific corporate bond the expected excess return over duration-matched government bonds can be estimated in three steps:

• The probability of rating changes are derived from a rating transition matrix;
• Spread and price changes for up- and downgraded bonds have to be estimated.
• Expected return is computed as the weighted sum of the price changes.

Consider a portfolio of 5-year A-rated US corporate bonds. Between 1989 and 2003 they traded on average at a premium of about 100 bp over durationmatched government bonds which is roughly the level that was reached in August 2003. Our show study s that 91.20 percent of these bonds maintain their rating and hence can be expected to earn an excess return of 100 bp over a 1-year time-horizon. Of the bonds rated A at the beginning of the year 2.66 percent can be expected to receive an upgrade in the course of the year.

Investors would expect to benefit from a subsequent spread tightening to an average of 55 bp if upgraded to Aaa or 70 bp if the bonds are upgraded to Aa. Conversely, downgrades below A would result in widening credit spreads and consequently negative excess returns versus duration-matched government bonds. Differences in accrued interest between corporate bonds and government bonds can be considered at this stage.

Developing and maintaining a keen awareness of the market will help a firm identify its sources of competitive advantage and disadvantage, and then to build on strengths and minimise its weaknesses. There are many ways to do this and tangible and intangible resources that can be used in the process.

Cash reserves can be used to finance sustained marketing campaigns, innovative development programmes or price
reductions.

Purchasing power and the ability to secure reliable supply at low costs develop competitiveness. Costs, quality, prices and delivery can be improved by building close working relations with preferred suppliers.

People are invariably the decisive factor in achieving success: an organisation can only be as good as the people who work for it. If there is typically a high staff turnover in the industry, the business should be geared to recruiting the best employees. If flexibility and speed of response are valuable (and they usually are), the organisation should be able to anticipate major decisions, making the right choices and implementing them.

Effective leadership is essential; its absence is a source of competitive disadvantage. Product factors inevitably have a significant impact on competitiveness. They include pricing and discounts, distribution channels, marketing methods, brand reputation and appeal, product quality and how the product relates to others (for example, the popularity of film merchandise rests largely on the success of the film).

Market awareness – understanding who the customers are and what they want (and do not want or need) – is also decisive in determining competitiveness. Few markets are clearly defined, and although a business may be open to any potential customer, it is important to know exactly who the core customers are so that their interests can be given priority.

Decision-makers should be able to recognise when competition may arise or when it is gathering pace. Competition can intensify in several circumstances:

When a market is expanding or new, as with computers and software over the past 20 years or with the mobile telecommunications industry during the past ten years.

When the stakes are high and there are big profits (or losses) to be made, notably when there are few organisations in a large market as, for example, with Coca-Cola.

When a market is about to change, perhaps as a result of developments affecting patents and intellectual property rights (for example, when the patent for a drug expires), or political or legal developments, such as privatisation.

When a market is shrinking, especially when there is overcapacity in an industry (usually one that is mature), with firms chasing fewer and fewer customers. This is apparent in a number of long-established manufacturing industries such as ship-building, steel-making and car production.