Bonds defined 73
investment bank who at the time led in Treasury sales – came down in flames because
of having manipulated the market in US government bonds. One would have thought
this has been an expensive lesson to be remembered by financial institutions; but it
was not so.
About ten years down the line, on 4 February 2003, a former top economist at
Goldman Sachs was indicted on seven counts of illegally trading on confidential
information about the Treasury Department’s plan to end sales of 30-year bonds. The
defendant, John Youngdahl, was charged with conspiracy, wire fraud, and securities
fraud, among other charges. Youngdahl pleaded not guilty and was released on
$800 000 bail pending a trial. He also faces a lawsuit by the Securities and Exchange
Commission. The lesson these references provide is that all parties issuers, under-
writers, traders, and investors – will be well advised to be and to remain on their
guard for all sorts of mishappenings.
Here is a further reference on how far a scam can go. Federal prosecutors in
Manhattan also charged a Wall Street consultant, Peter Davis, with illegally provid-
ing the information to Youngdahl, so he could pass it on to Goldman traders. Davis
pleaded guilty to conspiracy and wire fraud, prosecutors said. Goldman itself agreed
to pay more than $9.3 million to settle charges by the Securities and Exchange
Commission that it had failed to stop traders from buying on the news. It neither
admitted nor denied any wrongdoing.
Appendix 3.A The ECB algorithm
The European Central Bank algorithm for computation of yield-to-maturity:
P gross price, representing purchase price plus accrued interest
n number of future cash flows
cash flow at payment i
V annualized discounting factor, 1/(1 y)
time in years to the i-th cash flow
y annualized yield
1 The word ‘indenture’ stems from earlier times when agreements were written on
one side of the original sheet, after which the page was torn and the separate
pieces given to the parties involved. Indentures are important issues to company
financing. Essentially, they are the contract, or agreement, between the issuer,
trustee, and bondholders.
2 Peter Krass, Carnegie, Wiley, New York, 2002.
74 The Management of Bond Investments and Trading of Debt
3 Theoretically, small shareholders have an owner’s power over the company in
which they invest. Practically, they have no more such power than bondholders.
4 D.N. Chorafas, The Management of Equity Investments, Butterworth-Heinemann,
London, 2005.
5 D.N. Chorafas, The Management of Philanthropy in the 21st Century,
Institutional Investor, New York, 2002.
6 A more detailed discussion on markets of bonds, including more market, capital
market, and repo market, will be found in Chapter 11.
7 The Economist, 13 March 2004.
8 ECB, Bond Markets and Long-Term Interest Rates in EU Accession Countries,
Frankfurt, October 2003.
9 Credit spread risk is further discussed in Chapter 7.
10 ECB Monthly Bulletin, January 2000.
11 D.N. Chorafas, The Management of Equity Investments, Butterworth-Heinemann,
London, 2005.
12 D.N. Chorafas, Rocket Scientists in Banking, Lafferty Publications, London and
Dublin, 1995.
13 The Economist, 15 May 2004.
14 International Herald Tribune, 5 September 2003.

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