The Magic of Pricing Conventions

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Market Movers

by Ryan Avent

Main

Don't Bank on Loan Deals The Microsoft-Yahoo Merger-Arb Plays

Feb 15 2008 1:29PM EST

A banker makes a $10 million loan to a client at an interest rate of 10%. He then turns around and securitizes the loan, selling it to bond investors at an interest rate of 10%. Does that sound like a breakeven deal to you? Me too. But somehow, thanks to the magic of pricing conventions, our banker still manages to make a substantial profit of $270,000 on the deal. That's finance, that is. Be careful out there!

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