In Practice: Customized Bonds

In keeping with the notion of customizing bonds to match asset cash flows, firms have come up with increasingly creative solutions in recent years. In this endeavor, they have been assisted by two developments. The first is that investors in bond markets are more open to both pricing and buying complex bonds than they were in the 1970s and even the 1980s. The second is that advancements in option pricing allow us to value complicated securities with multiple options embedded in them. Consider a few examples:

• In the early 1990s, David Bowie acquired the rights to all of his songs, bundled them, and sold bonds backed by sales of his recording. What made the bonds unique was the fact that the interest rate on the bonds was tied to the sales of his recordings-higher (lower) rates with higher (lower) sales.
• In 2001, an Italian soccer team issued bonds to fund the construction of a stadium but tied the interest rate on the bond to the success of the team. Specifically, the interest rate on the bond would rise if the team stayed in the first division (and drew larger crowds and revenues) and drop if the team dropped to the second division.