Missing the Marks: Dispersion in Corporate Bond Valuations Across Mutual Funds
Gjergji Cici, Assistant Professor Economics & Finance,
Scott Gibson, Associate Professor of Finance Economics & Finance, and
John J. Merrick, Jr., Associate Professor of Finance Economics & Finance
How hard is it to mark illiquid securities for position valuation purposes? As it happens, the issue of accurate marks on the securities positions held by banks, hedge funds and mutual funds has become a hot topic for company boards and regulators and made front-page news in the financial press during the credit crisis of 2007. CEOs of bulge bracket investment banks have resigned in the midst of significantly revised write-downs of illiquid structured financial product asset values. The SEC is examining how accurately mutual funds and other investors “value their hard-to-value” securities. Furthermore, an investment adviser and several of its employees recently agreed to settle SEC charges that they negligently mispriced certain bonds owned by two high-yield municipal bond funds and caused prices for these funds’ shares to be artificially high. Thus, problems regarding the accurate pricing of securities are not confined to esoteric instruments and have direct implications for both asset allocation and the integrity of the investment process.
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