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David Bowie Bonds

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David Bowie, a British rock star, has issued bonds that are backed by royalties from his current albums. These are a novel type of what is generally referred to as asset backed securities.

The $55 million issue of 10-year notes were bought in entirety by Prudential Insurance Co. of America. The notes, which are rated single-A-3 by Moody's Investors Service, have an interest rate of 7.9%.

Issues

What Is A Private Placement?
When a corporation wants to raise new capital, funds can be obtained by making a public offering or a private placement. In a private placement, also called direct placement, securities are offered and sold to a limited number of investors. The investment bank that is representing the issuer plays the role of bringing together potential lenders and borrowers. As such, this market is more personal than its public counterpart.

What Does the 7.9% Internet Represent?
A bond issued selling at par, or $1,000, would have a yield equal to its coupon interest rate. Thus, if this bond were issued at par, which is the tradition unless otherwise stated, its yield would also have been 7.9% on the day of issue. The yield on 10-year Treasury notes was 6.3% .

What Does The Difference Between These Two Yields, 7.9% - 6.3% = 1.6%, Represent?
It represents a premium for the risk of the borrower defaulting, called default risk premium, as well as a premium for the fact that these bonds are not as marketable or liquid as U.S. Treasuries.

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By Alex Tajirian