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View Diary: There's Good News and Bad News for Detroit Pensioners (42 comments)

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  •  bingo re: futures contracts. (5+ / 0-)

    it's tantamount to investing based on the change in interest rates.  unlike w/ futures, though, there's a stream of payments based on a hypothetical loan, rather than a big payment at the end of the contract.  So, you and I do an interest rate swap: we'll assume a hypothetical loan of $100, you'll pay me 4% even and I'll pay you the prime rate + .75%.  Prime is currently at 3.25%, so right now I'd pay you $4 and you'd pay me $4.  Next year (these contracts usually call for quarterly payments, but them's details), Prime goes up to 3.5%, so you pay me $4 and I pay you $4.25.  We'd net these out so that I just pay you 25 cents.  And so on, for however long the contract lasts.

    Derivatives are often contracted between tax exempt entities (cities, charities, pensions) and financial institutions that pay ordinary income rates on all their income, regardless of type (when, say, Goldman Sachs sells an investment property for a gain, it doesn't pay a lower capital gains rate because it's in the "trade or business" of that shit.  Selling stuff just is its business, so no preferential rate).  So, AFAIK - and bear in mind I'm not an expert in corporate tax - there's not a lot of tax tomfoolery with these things.  For individuals, incidentally, the tax treatment sorta sucks.  I've had clients that have used them, and the tax treatment is deeply unfavorable for individuals.)

    Unlike CDS contracts, which were pooled to create their own synthetic securities, I don't think the interest rate swap contracts themselves get pooled.  usually pooled assets, like loans, are way to make bets on interest rates, so you wouldn't want to use an interest rate swap to change the underlying loans.  

    Interest rate swaps are usually considered "vanilla" and "boring," and that's probably because they don't get pooled and leveraged the way CDSs were.

    •  thanks again (2+ / 0-)
      Recommended by:
      2thanks, johnny wurster

      very helpful explanations.

      you should write about this financial stuff once in a while,

      as you obviously got a grip on the finer details.


      We all could benefit, from increased Financial Literacy.

      I try, but I can only take it so far, given my background.

      (about 4 or 5 Econ courses, back in the day.)

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