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In this paper the authors analyze the source and magnitude of marketing gains from selling structured debt securities at yields that reflect only their credit ratings, or specifically at yields on equivalently rated corporate bonds. They distinguish between credit ratings that are based on probabilities of default and ratings that are based on expected default losses. They show that subdividing a bond issued against given collateral into subordinated tranches can yield significant profits under the hypothesized pricing system. The marketing gain is generally increasing in the number of tranches and decreasing in the rating of the lowest rated tranche.
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