The models presented in the previous chapters describe the price formation process in markets with different structures. As we saw in the previous article, among the markets with trade pricing rules, those governed by an order-driven execution system can be organized either as a continuous or as a call auction, while markets with a quote-driven system can be either a bilateral dealer market or a continuous auction that works as a limit order book.Within this outline, the Glosten and Milgrom (1985) model describes a bilateral quote-driven market in which dealers’ competition guarantees semi-strong efficiency; Kyle’s (1985) model proxies an order-driven call auction market where a specialist, or a number of market-makers, sets the market-clearing price after observing his, or their, customers’ aggregated order flow. Finally, the Grossman and Stiglitz (1980) model proxies an order-driven market where all participants can submit their demand schedules simultaneously.1 Since each demand function is a fairly accurate representation of a large number of small limit orders (Brown and Zhang, 1997), this market can be interpreted as a limit order book. As the next section shows, this interpretation has the advantage of considering all market participants as potential liquidity suppliers, i.e. of embodying the order-driven feature of a limit order book (LOB); it fails, however, to incorporate either the discriminatory pricing rule that characterizes an LOB or the agents’ strategic choices between limit orders and market orders. Section8.1 will introduce the reader to the discriminatory pricing rule and will sketch a basic model that embodies this rule; in this model, however, agents cannot choose the type of order to submit to the LOB, so section 8.2 presents models in which the choice between market and limit orders is endogenous.
Category Archives: accounts recievable
A credit discriminatory pricing rule
Different degrees of loans subordination
A second method to slice the corporate bond universe, especially the financial sector, is by different degrees of subordination. We discuss the characteristics of different types of bank debt in detail. In summary, Tier 1 preferred, Upper Tier 2 and Lower Tier 2 differ from senior bank debt in two major dimensions: with respect to loss absorption and interest deferral features. Both Tier 1 and Upper Tier 2 capital are able to absorb losses. But while missed interest payments are canceled immediately for Tier 1 issues they are repaid at a later date for Upper Tier 2 bonds. On the other hand, Lower Tier 2 debt contains no loss absorption features.
Selection of your credit spread class
The risk profile of a credit portfolio, in absolute terms as well as relative to a benchmark index, is largely determined by the weighting of different risk classes. Of course, the allocation of capital to riskier asset classes not only increases risk, but also offers ample opportunities for outperformance. From a top-down perspective there are various methods to split the corporate bond universe in different risk classes. Here the three most popular approaches are introduced: dividing the universe by rating classes, by degrees of subordination or by the degree of cyclicality of the different industries.
If the exuberant loans expectations would be fulfilled,
A lot of this M&A frenzy was financed by debt. Consequently, the balance sheets of many companies deteriorated rapidly. Doubts, if the exuberant profit expectations would be fulfilled, and concerns about company leverage initiated the decline in equity markets. The bubble burst when investors realized that they were not compensated for the downside risks associated with investing in overvaluated tech companies. When a few of the TMT newcomers began to struggle, investors had to acknowledge that there was no free money to be made in TMT IPOs. Highly leveraged balance sheets caused serious problems for some of the brightest stars of the equity hype, and for some of the big companies. Actually much of the equity bubble was concentrated on large cap companies.
Money managers dance better for a price
A money manager is not a psychologist for the difficult years. A money manager’s primary interest is in keeping your account, not helping you with your emotions. When the market and your account crash, a money manager is unlikely to admit his responsibility in loading up on overpriced stocks at the wrong time. More likely, he will attribute the loss to forces over which he is powerless and recommend you hold on for the certain recovery. Though recovery is never certain, and often takes decades, the money manager will be paid during the wait. Or the money manager might recommend a shift into less volatile bonds to quell your nerves. Typically, bonds require little research and monitoring for the money manager, and often they are chosen just as bond prices have peaked.
Your biggest liability working with a money manager is your sense of loyalty. You must be willing to cut and run when it becomes apparent that your money manager is not performing. Your ego also gets the best of you here. Beginning a conversation with “My money manager says…” indicates a degree of wealth and sophistication. “My index fund…” will only elicit boredom. Denial is not your friend either. You must analyze what your money manager is doing, get second opinions, and question him directly.
People pleasers will have difficulty here.
What are accounts payable? – part 2
Structured similarly to A/R, ACCOUNTS PAYABLE is another subledger that feeds the general ledger with summaries of more detailed information. Information about disbursements flows through the ACCOUNTS PAYABLE system from sources both within and outside the company and travels up to the general ledger to become part of your company’s overall financial picture.
A well-designed and well-managed accounts payable system will reliably track the amount owed each vendor and when to pay based on agreements with that vendor. The system keeps a running tally of amounts paid so it can be checked against budget. It also is the system that provides the necessary information for generating your company’s 1099 statements (for reporting amounts paid to suppliers).
guidelines your collection staff should follow when dealing with debtors – part 4
At all times, maintain a professional, unemotional demeanor. If the collection efforts turn personal, your collector loses his or her professional leverage, destroys any spirit of cooperation, and may frighten the debtor away. Keep it professional, have a plan, and know the options.
And, if all else fails, sue the debtor for the amount owed. Good attorneys will counsel against spending more on legal fees than the company stands to collect. But even a small claims action will signal to the marketplace that the company means business.
However, winning a judgment is one thing. Collecting from a debtor who has no money… well, you’ve heard the story about getting blood from a stone? Learn from that.
Guidelines your collection staff should follow when dealing with debtors – part 1
Reach an agreement with the debtor on the amount owed. One of the key things the collections person can do is help the debtor overcome his or her internal resistance. With the exception of a disputed amount, most debtors know they must pay and, more often than not, most want to pay. Getting them to verbally acknowledge their debt—recording what they said and when— may put the company ahead of another of that customer’s creditors. The more a company can work with a debtor, the more likely it is that the company will see its money.
Maximizing Your Collections Efforts – part 1
The first thing to realize is probably the most important rule of bad debt collection: the collection effort begins before the sale is made.
If you wait until a debt goes bad and the debtor goes south, the likelihood of collection is low. But if the sales person takes time to qualify the account, check bank references, and otherwise ensure this person or firm is a quality company with a good record, then fear of bad debt down the road is greatly reduced.
Managers can help the effort by making sure that the sales person is financially respon-sible for that account, by limiting his or her ability to earn commission on any sale that goes bad. That type of incentive will make all the difference in the world.
A Guide to Tracking Receivables: The three indicators – part 2
Receivables tracking reports provide a system to determine which customers need to be reminded to pay, a process called dunning. It’s tough to nag customers for payment, but it may be necessary. The first approach is generally by letters—polite at first, then threatening if polite doesn’t work. These efforts are usually automated. The letters may be supplemented by phone calls or visits. In the worst cases, plan on collections efforts and/or legal action. Then take a look at the reserve for bad debts.
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Recent Posts
- A credit discriminatory pricing rule
- Types of bank capital represent its own credit risk class
- Different degrees of loans subordination
- General fluctuations of credit spreads
- Investors require a premium for taking on credit risk
- Lagging indicators of credit quality
- Selection of your credit spread class
- The tactical asset allocation in credit portfolios
- The flow of your credit funds
- Substituted equity by debt
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