Structured Bonds and Greek Demons. Is the attack †fair†?

The severe political turmoil provoked by an allegedly mispriced private bond issue in Greece added to the controversial matter of whether prices of structured bonds sold to investors are †fair†or not. In this paper structured bond market is analysed with particular focus on valuation issues. It is argued that in practice prices are subjective, there is not a unique price that a structured bond should be transacted and model prices are in general irrelevant to the investor unless he has access to the underlying swap market. Consequently, the notion †overpricing†(conventionally defined as the difference between model and transacted price) is misleading. Boundaries for prices as seen by investors and issuers are constructed under a set of simplified assumptions. Issue price is the recommended price that a structured bond should be offered in the primary market and in most cases differs from model price. Competition among issuers should minimize the difference between them. The analysis of the market in Greece has revealed investors’ preferences to capital guaranteed interest rate linked bonds with mild structuring. Despite popular belief, overpricing was soft with the absence of the usual marketing pitfalls that happened elsewhere. Exception were the Tier I structured bonds issued by local banks.