A) Can anybody explain why this is wrong? “Put structures will provide investors with some protection in the event that interest rates rise sharply but not if the issuer has an unexpected credit event”. B) The answer says this is right, but I’ve never head of (neither can I find this term/expression in the textbook - did a search) the term "credit bullet’. Does it mean just “bullet bonds”? “Credit bullets in conjunction with long-end Treasury structures are used in a barbell strategy.” C) In regard to barbell stratety, I’d like to confirm that: Credit bullets in conjunction with long-end Treasury structures is ONE WAY OF using barbell strategies? In my vague memory there seem to be other slight different ways? Thanks guys.
A) im guessing the sharply in the statement would indicate the Issuer of the putable bond may not be able to pay the face value of the bond as the credit markets have made it more difficult for the company to issue new debt to pay off the obliigation being put back to the issuer.
B) Credit = debt (which could means bonds)
bonds are a type of fixed income (credit) instrument
C) the text says treasury barbells are preferred but some traders use credit bullets upfront with a treasury bond on the long-end.
Thanks Galli, I think B, C are explained well. For A, I don’t have a problem with sharply, but the later part " not if the issuer has an unexpected credit event”. I’m thinking it refers to a credit downgrade event? If there’s a downgrade and not a defalut, the put will also protect the investor.
Let me know if I’m right.