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An Introduction to Derivative Securities, Financial Markets, and Risk ManagementAdvanced Financial Risk Management, 2nd ed.

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Traditional analysis of common stocks uses a wide array of financial ratios to measure value. One of the ratios most often discussed is the dividend yield on a stock. In this note we explain why the dividend yield ignores credit risk. We show that a credit-adjusted dividend yield provides much greater insight to the likely dividend return to common stock investors, as we explained in a recent note on General Electric Company (GE). Using the example of Comcast Corporation (CMCSA), we show that the long-term credit-adjusted dividend ratio is 1.61%, not the commonly quoted 1.86%. The credit-adjusted dividend yield allows investors to compare dividend yields on companies of wildly varying credit risk on an apples to apples basis.

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Comcast Corporation (CMCSA) has a tender offer outstanding for Time Warner Cable (TWC) that is pending regulatory approval . The outcome of that transaction will have a significant impact on the risk and return to both common shareholders and bond holders. Still, in today’s analysis, we make no assumptions about the future and let the bond market facts lead us to the appropriate conclusions. Those facts presumably reflect a trade-weighted guess as to how the Time Warner Cable bid will end up. Today’s study incorporates Comcast Corporation bond price data as of April 14, 2014 to get an institutional, bond market view of the company.

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Vodafone Group PLC(VOD) recently agreed to purchase Spanish cable operator Ono S.A. for 7 billion euros. Vodafone Group PLC itself has been a potential take-over target, with AT&T (T) announcing on January 27 that it had no intention of making a bid. Still, in these notes, we make no assumptions about the future and let the bond market facts lead us to the appropriate conclusions. Today’s study incorporates Vodafone Group PLC bond price data as of April 11, 2014 to get an institutional, bond market view of the company. We analyze the potential risk and return to bondhold

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Projected one month bill rates fell this week along the first eight years of a ten year projection. Forward 1 month T-bill rates are now projected to peak at year-end in 2021 at 3.92%, down from a 4.05% 2020 peak projected last week. This is the third consecutive implied peak in one month bill rates, something not seen for a few years. The impact of the peak can be seen in the three dimensional graph of Treasury yield movements (below) and Treasury and mortgage forward rates. The forecast shows projected 10 year U.S. Treasury yields rising steadily to 4.095% in 2024. Projected 15 year fixed rate mortgage yields in 2024 show a rise to 5.908%.

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On April 9 in the U.S. bond market, there were 31,209 bond trades in 4,939 non-call fixed rate corporate bond issues representing $11,154,904,132 in notional principal. Which 20 trades were the best trades of the day, and how do we decide the answer to that question? Today, we answer those questions for bonds with maturities of 10 years or more at the request of many investors.

Conclusion: We find that 77 bond issues met our trading volume criterion of $5 million or more. The best-value non-call senior fixed rate bond trades with maturities of 10 years or more on April 9, 2014 were issues by these firms:

  • GOLDMAN SACHS GROUP INC. (GS), 2 issues
  • HESS CORPORATION (HES)
  • KINDER MORGAN ENERGY PARTNERS LP (KMP)
  • AIG LIFE HOLDINGS INC. (AIG)

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