Swedish Lottery Bonds Case Solution
Each bond issue has a series of numbers and order numbers through which they are issued. Moreover, these bonds can be reissued through changing their terms and conditions along with maturity. The dual structure leads to increase the chances for generating and distributing the winning bond lottery based on its coupon payment with sires and order numbers.
Some other features include:
- These bonds are noncallable government debt
- The return is received for each lottery bond is two to three times in year
- The time to maturity changes in between five to ten years after the issuance of lottery bonds, this provides the return nearly ten to thirty times until its maturity
- The holder of the bonds can convert the old bonds into the new bonds by changing its terms and conditions
- The principal amount is paid at the time of maturity
- The lottery bonds are issued in the retail markets with the volume issuance of 50 to 200 quantities
- The par values of lottery bonds are from $ 1000 to $ 10,000.
- They are issued by their serial and loan number
Sources of risk relative to a traditional coupon bond:
The lottery bonds provide various benefits relative to other traditional bonds (such as; government bonds and treasury bills).However, some risks are also associated with it. The lottery bonds are used as the diversification of investors; in the sense it provides the trading of the bonds profitability with the tax shield and ensures yearly payment. Along with this, it provides the standardization and eliminates the interest rate risk and credit risk because of government involvement. Various risks includes such as:
- The Swedish lottery bonds provide uncertain payoffs after having the identified distribution opportunity
- It does not provide the equilibrium premium as in the case of traditional bonds that provide fixed monthly return based on the market returns
- Small number of investors get the coupon return only decided by the pyramid
- The Swedish lottery bonds’ return is determined by its coupon yield; the risk arises when the variance increases then the price of the lottery also increases that rewards the extra lottery risk.
- The government did not use to provide extra rewards on the extra amount paid for the lottery bonds that reflect the risk.
- As the demand varies and most of the investors seek the high risk â€“ return bonds such as corporate bonds or any other Treasury bond but this provides the reduced risk premiums.
3.Â Â Â Â Â Does the SNDO face similar risks as a seller of the bonds as opposed to being the investor? Why or why not? Why is the differential risk important?
The main objective of the SNDO is to manage the government bonds through reducing the cost of debt along with challenges and risks. The SNDOâ€™s responsibilities involve setting the annual guidelines and the debt policy of the state to manage the debt. The risks faced by the SNDO include:
- Difficulty in maintaining the bonds as the new issue and maturity of lottery bonds take place at a one time
- The coupon rate is not known at the time of issue of the bonds
- If the bondholders invest in the series of consecutive bonds, it provides minimum return due to fixed interest rate
- The source of risk is associated with the distribution channel, in which SNDO feel complications in selling lottery bonds; it requires some more marketing and brand offerings
The differential risk faced by the SNDO is to set the coupon rate, which is the most difficult task………………..
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