Valuation: Global Bond Markets Overview
The first module on Global Bond Markets is part of the ongoing series on Valuation. This educative video discusses broad overview of major actors within the Global debt markets, classification of selected different kinds of bonds including international bonds, mortgage backed securities etc. The video is divided into two parts with the later part introduces concepts of yield, yield to maturity (YTM), yield curve, spot rates along with an example of valuing bonds and overview of a call option. The module includes valuing bonds using excel sheet and a the excel sheet is attached below for your analysis.
There is a brief introduction to the concept of options with an overview of call option (long). This is important to understand not only callable bonds but to under concepts in derivatives.
A detailed article on Global Bond Markets is published under Insights section and it is suggested read along with this tutorial.
Excel sheet on global bond markets module can be assessed here Bond Module
Insights article here
Calculate the discount rate for a 15-year Zero Coupon bond with a maturity value of 1000. The present vale of the bond is 400. Calculate using excel and mathematically using the formula. (Hint use rate function in excel. In a zero-coupon bond the periods will double i.e. N=30). Ans 6.2%
A 10-year bond of face value 1000 is trading at 940. The coupon rate is 6% paid semiannually, find the yield to maturity of the bond. Hint (Use excel function rate. N=20, PMT = 60/20, PV=-940, FV=1000, 0 option for type.
Now for the above question calculate yield to maturity if the coupon of 6 % is paid quarterly. Ans: 3.42%
True or False
- Spot rates of treasuries of varying maturities are used to calculate yield curve
- The second biggest actor within the global bond markets is government.
- One of the difference between Covered Bond market in Europe and residential mortgage backed securities is that the pool of securities in the covered bond market is dynamic.
- The yield curve is a good barometer of the economic situation prevailing between the countries.
- Corporates tap the bond market to finance capital intensive projects.
- The speculative grade of corporate bonds are rated below BBB ratings given by Standard & Poors
- Speculative bonds carry less coupon rate compared to investment grade bonds.
- Senior subordinated debt is superior to subordinated junior debentures.
- An Austrian company wants to raise capital in dollars in the US. Its offers a $7M issue underwritten by an international syndicate. This is an example of Eurodollar bond offering.
- Onshore bond market is an example of international bond market.
- Higher the maturity of the bond, lower the volatility of the bond.
- The relationship between yield and price is inversely related.
Answers ( T, F, T, T, F, T, F, T, T, F, F, T).
Oats and Peas are two listed companies. Oats has credit rating of A and Peas BBB. the default rate is as follows.
Year 2 5 10
Default Rate 2 4 9 for A rated companies
Default Rate 3 5 11 for BBB rated companies
The above chart implies that on an average 4% companies default after 5 years for A rated companies and on an average 5% for BBB listed companies. If Oats defaults after 10 years and Peas defaults after 5 years. Calculate the default loss rate for both the companies. Assume Investors recover 70% for Oats and 40% for Peas. What is Peas default rate for 10 years? Which time period will you use to compare default loss rates for both these companies in this example. Why is the default rate of Peas higher than Oats?
Oats 2.7% for 10 years, Peas 3% for 5 years ( Based on a question from Fabozzi).
Peas 6.6% for 10 years. 10 years or 5 years since the time period should be same keeping other factors constant when comparing the default loss rates among companies.
References and Reads
- The world that changed the bank: World Bank
- 2020 SIFMA Outlook
- Frank Fabozzi Bond Markets, Analysis and Strategies
- Creating Domestic Capital Markets in Developing Countries: Perspective from Market Participants by Dimitri Demekas and Anica Nerlich