Editor’s Letter

In this issue of the Journal of Fixed Income, the first article explores the wave of failures in the auction rate bond market. Baixiao Liu, John McConnell, and Alessio Saretto provide evidence that these failures were a function of interest rate caps—that is, the lower the maximum auction rate, the higher the likelihood of auction failure. In the next article, Laurie Goodman, Roger Ashworth, Brian Landy, and Ke Yin analyze the negative effect of second liens on the performance of first liens and the implications for loan modifications.

The remaining articles in this issue are related to corporate credit. First, Ren-Raw Chen, Frank Fabozzi, and Ronald Sverdlove employ a transaction database with bid–ask spreads on credit default swaps to incorporate liquidity and reconcile CDS premiums and bond credit spreads. Then, José González-Heres, Ping Chen, and Steven Shin find supporting evidence for Altman’s definition of distressed debt. Furthermore, they decompose the risk premium into liquidity and credit components, with the latter being relatively stable over time.

In the next article, Gady Jacoby and Ilona Shiller examine the impact and interaction of the callability and default options on the effective duration of corporate bonds. Their evidence provides further support for structural models of corporate bond valuation. Finally, Libor Pospisil and Jing Zhang explain that the observed momentum in prices of high-yield bonds are attributed to credit cycles and the observed reversal patterns in investment-grade bond prices are due to differences in effective duration.

We hope you enjoy this issue of the Journal of Fixed Income. Your continued support of the Journal is greatly appreciated.

TOPICS: Fixed income and structured finance, fixed-income portfolio management, portfolio theory

Stanley J. Kon

Editor

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