The Most Basic Missing Instrument in Financial Markets: The Case for Bonds for Financial Security

16 Pages Posted: 7 Feb 2017

See all articles by Arun Muralidhar

Arun Muralidhar

AlphaEngine Global Investment Solutions; George Washington University

Kazuhiko Ohashi

Hitotsubashi University - Graduate School of International Corporate Strategy

Sung Hwan Shin

Korea Fixed Income Research Institute

Date Written: December 1, 2016

Abstract

The move to defined contribution plans has transferred risk to individuals who are least capable of bearing such risk and requires them to make complex decisions for which they are not prepared. Accumulation (investments) and decumulation (annuity purchase) decisions are complex, costly, often with different entities (asset managers and insurance companies), result in illiquid investments (annuities), and still may result in highly uncertain pensions (because of interest-rate volatility). This paper argues that governments globally can address the shortcomings by issuing a new type of bond that matches the needs of investors saving for retirement. This financial instrument is basically an inflation-linked bond that pays coupons when you need it. We call these Bonds for Financial Security (BFFS) and argue that this single instrument can help investors achieve retirement objectives at lower risk, lower cost, and with greater liquidity and greater simplicity than portfolios created through a mix of traditional stocks and bonds followed by annuity purchases. The need for such a bond is simple to understand: A typical saver sets aside resources today to receive a stream of income post-retirement (for a fixed period) and the BFFS is the “riskless asset” because it guarantees the purchasing power post-retirement. The paper goes further to demonstrate that there is a potentially willing supplier of such bonds — governments that need to invest in infrastructure and have a desire to prevent a retirement crisis, thereby completing the market. The cash flows of such a bond are contrasted with those of infrastructure projects to show how such bonds may foster infrastructure financing. The paper also addresses challenges, issues, and opportunities surrounding such an instrument and examines issues relating to the creation of a market for BFFS.

Keywords: Retirement Security, Inflation-Linked Bonds, Bonds for Financial Security, BFFS

JEL Classification: G10, G11

Suggested Citation

Muralidhar, Arun and Ohashi, Kazuhiko and Shin, Sung Hwan, The Most Basic Missing Instrument in Financial Markets: The Case for Bonds for Financial Security (December 1, 2016). Journal of Investment Consulting, Vol. 16, No. 2, p. 34-47, 2016. Available at SSRN: https://ssrn.com/abstract=2880002

Arun Muralidhar (Contact Author)

AlphaEngine Global Investment Solutions ( email )

Great Falls, VA
United States

HOME PAGE: http://www.mcubeit.com

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

Kazuhiko Ohashi

Hitotsubashi University - Graduate School of International Corporate Strategy ( email )

Tokyo 101-8439, Chiyoda-ku
Japan

Sung Hwan Shin

Korea Fixed Income Research Institute ( email )

Seoul
Korea, Republic of (South Korea)

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