BOND PORTFOLIO IMMUNIZATION: TESTS OF MATURITY, ONE- AND TWO-FACTOR DURATION MATCHING STRATEGIES

This paper provides additional evidence on the usefulness of duration as a strategy tool by developing a two-factor duration model and by using a reasonably reliable database to compare empirically the relative performance of maturity, one-factor duration, and two-factor duration matching strategies in immunizing portfolios of default-free and option-free bonds against interest rate risk. The results suggest that, on average, duration models, even for arbitrarily assumed simple stochastic processes, are more accurate than maturity models and that increased accuracy may be achieved by increasing the length of the planning period and the number of factors in the model.     

BOND RETURNS,DISCRETE STOCHASTIC PROCESSES,AND DURATION

A particular duration measure may correspond to many different stochastic processes that generate fluctuations in the term structure of interest rates. There does not exist a one-to-one correspondence between the duration measure and an underlying stochastic process. In particular, durations derived from disequilibrium processes also correspond to equilibrium processes. Furthermore, it is shown that multi-factor discrete models of bond returns may also correspond to multi-duration models of bond returns.     

Deregulation of commercial TV in the USA: Control by government or market

Following the FCC's decision to partially deregulate radio, attention is now focusing on the possibility of television deregulation. The authors review the radio deregulation decision and apply similar criteria to television. Debate centres around government v marketplace control; the extent to which stations meet FCC standards for information, local and total non-entertainment programming; and, the effect of deregulation on provision of non-entertainment programming. The real question is when should deregulation take place. The authors suggest that the FCC and Congress should pave the way for deregulation by encouraging competition.     

The Effect of Business Risk on Corporate Capital Structure: Theory and Evidence

Under corporate and personal taxation, we demonstrate that the relation between optimal debt level and business risk is roughly U-shaped. This result follows from the fact that the tax liability is an option portfolio that is long in the corporate tax option and short in the personal tax option. Therefore, the net effect of a change in business risk on the optimal debt level depends upon the relative magnitudes of the resultant marginal changes in the values of these two options. Results of empirical tests offer support for the predicted U-shaped relationship.     

Rewrites of an Expert System—Lessons Learned

One component of the 1986 Tax Law was to require taxpayers to file information returns on magnetic media if the quantity to be filed was sufficiently large. A waiver from this filing requirement was possible under hardship and other criteria, and could be obtained by filing a form with the Internal Revenue Service (IRS). Initially, the processing of waiver requests was accomplished manually by several relatively high-level analytical personnel. The IRS's Artificial Intelligence Laboratory (AI Lab) created an Expert System to automate the process. An initial prototype was developed in OPS5+, an AI language, and the system was used on all waiver requests for Forms 1099 for Tax Year 1987, demonstrating feasibility and capability. The system was expanded in the following year, and used on waiver requests for all form types. For Tax Year 1989 the system was rewritten in LEVEL5, so that it could be more easily maintained by in-house personnel. However, implementation problems forced a rapid rewrite, using CLIPPER, a dBase III+ compiler language. This version was subsequently used for all waiver requests for Tax Years 1989 and 1990. Presently, one clerical person can handle all of the waivers. This paper deals with the reasons and ramifications of this language-shell-language transition.     

Federal financial guarantees and the occasional market pricing of default risk: Evidence from insured deposits

This paper develops a two-date state preference model which demonstrates that investors' valuation of third-party guaranteed debt depends on the financial condition of the guarantor. As the solvency ratio of the guarantor declines, investors demand higher promised rates on the firm's debt securities and price the firm risk variables more sensitively.The empirical results are derived from sample data of FSLIC guaranteed obligations from the late 1980s. Evidence shows differences in the market's perception of FSLlC's insolvency between 1987 and 1988. The market response to a decline in the financial condition of the guarantor affected the value of insured CDs, raising CD rates in relation to the Treasury curve and firm risk pricing of insured deposits emerged.