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• Friday, August 17, 2007 11:47 AM

  eyesay -- as you say a little knowledge is a dangerous thing

  A bond issued at a discount of its face value at maturity is not strictly a Zero Coupon Bond -- FYI, many US government bonds have been sold that was for, oh at least decades.

  Zero coupon bonds were created as derivatives - there is a tendancy to assume that standard bonds without coupons are the same thing -- but they are not. Sometimes the bond is traded, sometimes a derivative representing the bond as held in a depository without the coupons -- in any event it is derived from the bond plus coupons. Incidentally, it was trading in the other asset, strips, that landed Orange County in trouble when interest rates fell so much that people paid off the mortgages and the coupons fell in value (while the zero coupon soared.)

  A derivative is what it says, a tradeable instrument derived or deriving its value from at least one other tradeable instrument (and maybe more.) Mortgage backed securities are not derivatives because the underlying asset is not tradeable as a "trade instrument" though you can sell individual mortgages on - they are often used to create derivatives.

  Less knowledge is a dangerous thing -- and you are simply wrong in your statement of what a derivative is. Easay, have you learned the lesson yet, don't "twit" people unless you are sure of the fact you are "twitting with"

  —MacK.. Read MacK..'s other letters
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