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Wait... but bonds these days are usually issued to fund stock buybacks, which inflates the stock price. Why would you short the stock in that case?
by rmrfrmrf 7y ago
Wait... but bonds these days are usually issued to fund stock buybacks, which inflates the stock price. Why would you short the stock in that case?
- ThrustVectoring 7y agoYou short the stock because it has price moves in the opposite direction of the bonds, so you can afford to buy more bonds without undue risk of losses. Like, the trade has several pieces: 1. Buy the corporate bond, getting the credit spread over equivalent treasuries 2. Short the same face value of stock, which gives you back the price of the bonds in case of bankruptcy. 3. Buy call options on the stock to close out your short position, costing you the option premium to go into the trade. Also, stock buybacks don't (or at least shouldn't) increase stock prices.
- xbmcuser 7y agoIt would increase stock price as this results in fewer stock owning larger part of the company. 10 stock for a billion valued company. It buys back 2 shares now the same company is owned by 8 share some of the value will come down as less cash reserves but if it is a company with growing revenue and profits the individual share price will go up.
- ThrustVectoring 7y agoThe decrease in cash reserves should exactly cancel out the decrease in outstanding shares. Buybacks still help corporate executives, though. They have stock options, and buybacks make the stock price more sensitive to profits (since the company is smaller because it has less cash on hand).