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.

Air France, in common with other established carriers in Europe and North America, found its traditional markets threatened by the downturn in the airline industry and the increase in low-cost carriers. To remain competitive, the company paid special attention to four techniques:

Reacting rapidly. All Air France’s main decisions following the crisis of September 11th 2001 were taken on September 18th. They were later adjusted and developed, but the new strategy was formed and implemented quickly.

Acting collectively. The board meets to react quickly, considering how best to respond to events and how to co-ordinate their response.

Constantly looking at all competitors. This keeps the business lean and focused on what matters. In France, there has been an established lower-cost competitor to Air France since 1981: the TGV high-speed train. This has meant that many of the disciplines needed for competing with low-cost operators have been developed over many years.

Using all available resources. Competing has meant employing all the assets and advantages that a big industrial carrier has in order to counter low-cost operators, including its brand, market position and operational strengths. Often a competitor’s strategy is to build market share with temporary low prices and then to raise them. An active and patient approach can help to reduce or remove the threat of competitors.