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Wells Fargo & Company Wells Far Message Board

  • jad1148 jad1148 Jan 28, 2012 7:04 AM Flag

    Why 116% of par?

    I don't get it.

    Why do you folks bid the price up to the point where it trades at such an extreme premium to par that you've destroyed your return?

    In spite of the fact that this does pay 8% of par, Friday's close at $29.00 now puts the price at 116% of par, and, according to my calculations, puts the yield to call below 5%.


    Are you that sure that WFC will continue to pay 8% forever and not call it on, or just after, 12/15/2017?

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    • It is a law of finance, just like water seeks its own level in nature, that the price of an asset will move up or down in relation to overall market rates, adjusted by credit risk and a liquidity premium. What would the yield to maturity or first call be for an instrument issued by Wells now if it were sold at par? That should be the same as the yield of any existing similar instrument. Do you think someone holding one of these bearing a nominal 8% rate should sell at par? And then take those proceeds and invest at a market rate much lower? Of course not. Price will go up until an equilibrium is reached with overall market rates for equivalent assets.

      And as would be obvious to anyone with an ounce of financial sense, it is not just buyers bidding up the price, it is sellers demanding that price as well. Supply AND demand.

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