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Financial institution credit assessment and implications for portfolio managers

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  • Purda, Lynnette
  • Sonmez, Fatma
  • Zhong, Ligang

Abstract

We document systematic industry differences between the yields of bonds issued with the same credit rating. Specifically, financial firm bonds provide higher yields after controlling for issue and firm-specific characteristics. An exception is the debt of large financial issuers, consistent with the too-big-to-fail phenomenon. Evidence of higher yields extends to syndicated loans but does not translate to abnormal returns in secondary bond market trading when returns are explained by a four factor model. Our results suggest that portfolio managers could use financial institution bonds to generate greater yield within their rating constraints but doing so may increase exposure to risk.

Suggested Citation

  • Purda, Lynnette & Sonmez, Fatma & Zhong, Ligang, 2015. "Financial institution credit assessment and implications for portfolio managers," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 38(C), pages 148-166.
    • Handle: RePEc:eee:intfin:v:38:y:2015:i:c:p:148-166
    DOI: 10.1016/j.intfin.2015.05.018
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    More about this item

    Keywords

    Financial institutions; Credit ratings; Reach for yield;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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