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FINRA Investor Alert: Cat Bonds

Catastrophe Bonds and other Event-Linked Securities

The Financial Industry Regulatory Authority (FINRA) published an Investor Alert on catastrophe bonds, or 'cat bonds'. Cat bonds pay higher interest rates compared to the equivalent corporate bonds.

However, there are risks involved in holding cat bonds. Investors of a cat bond can lose interest and principal if the catastrophe, to which the bond is linked, occurs. Cat bonds are quite illiquid, the pricing information are generally not...

SLCG Research: Collateralized Mortgage Obligations

SLCG released today 'A CMO Primer: the law of Conservation of Structured Securities Risk'.

Recently, the finance industry witnessed the bailout of two Bears Sterns hedge funds and the collapse of Brookstreet Securities. Both had portfolio holdings of collateralized mortgage obligations (CMOs) and suffered huge losses thereof. We have seen such CMO losses before, when in 1994 interest rates rose, CMOs fell in value and bond mutual funds suffered unexpected losses.

In this paper, Dr....

SLCG Research: Closed-end Fund IPOs

SLCG released today 'Closed-end Fund IPOs'.

In this paper, Dr. Edward O'Neal explains how closed-end funds trade at a discount to their net asset value (NAV). Dr O'Neal finds that at the initial public offering (IPO), a closed-end fund's offering price is set at its NAV. Yet during the year after the IPO, a closed-end fund's price drops as much as 5% from its offering price at the IPO. Furthermore, investors pay huge commissions on the sale of the closed-end fund, generating a premium...

Registered Rep.: A Tempest Over Structured Products

A Tempest Over Structured Products

Registered Rep. issued a news release today reporting on the state of the structured products market. The sale of structured products has grown by an estimate of 33% from 2005 to 2006. Yet the general features of structured products seem to make these products unattractive: complex, expensive, and illiquid. Financial advisors might favor structured products for it enables portfolio diversification and for its ability to tailor to the specific needs of...

Forbes: Guaranteed to Go Up

Guaranteed to Go Up

Forbes published an article examining structured products sold to retail investors around the world. It describes how a structured product works, the payoffs and risks, using an example of the principal protected note. It then explains how the principal protected note is equivalent to and can be replicated by a combination of traditional securities and derivatives.

A principal protected note returns at least the face value of the note at maturity. If the reference...

FINRA Investor Alert: Variable Annuities

Should You Exchange Your Variable Annuity?

The Financial Industry Regulatory Authority (FINRA) published an Investor Alert on how to determine if investors should exchange their variable annuity for another model. An annuity makes periodic payments to the holder of the annuity. There are fixed annuities that make fixed payments and variable annuities that make variable payments.

While equity-indexed annuities have become increasingly popular, some have questioned their value and...

FINRA Press Release: Structured Products

NASD Provides Guidance Concerning the Sale of Structured Products

The Financial Industry Regulatory Authority (FINRA) published a NASD Notice to Members 05-59 providing guidance to members concerning their sales practice obligations when selling structured protects to retail customers.

The complexity of structured products can often obscure their risks. It is therefore important that investors are protected from unscrupulous sales practices that might arise in an unregulated...

FINRA Press Release: Best Practices

NASD Recommends Best Practices for Reviewing New Products

The Financial Industry Regulatory Authority (FINRA) published a NASD Notice to Members 05-26 providing best practices guidelines for firms on "developing and vetting" new structured products. This notice was motivated by the increasing popularity of structured products and the increasing complexity of these products.

Because structured products can be so complex, investors should be careful when considering them. They should...

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