ANZ Debt Indices - Descriptions
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1 ANZ Debt Indices - Descriptions Publication Frequency The ANZ Debt Indices are calculated and published daily, after the close of trading, on all days on which banks are open for general banking business in both Auckland and Wellington, New Zealand. That is, each day Monday through Friday, excluding national public holidays and, except where it is the last calendar day of the month, also excluding regional holidays observed in Auckland or Wellington (i.e. Auckland Anniversary Day or Wellington Anniversary Day). Where the last calendar day of the month is a regional holiday observed in Auckland or Wellington, indices for that day shall be published on that day. If the last calendar day of the month is a weekend or public holiday indices for that date are calculated by projecting the previous trading day's closing prices forward as necessary. If the last calendar day of the month is a regional holiday observed in Auckland or Wellington, indices values are calculated for that day. No value is calculated for a regional holiday observed in Auckland or Wellington where that day is not the last calendar day of the month. A monthly report for the ANZ Debt Indices is also published on the last calendar day of each month, even if that day falls on a regional holiday observed in Auckland or Wellington. Where the last calendar day of the month falls on a weekend or a public holiday, the monthly report is published on the previous trading day. National public holidays are listed with our trading hours. 1
2 ANZ Government Bond Indices The purpose of the indices is to track the performance of New Zealand Government Bond market. ANZ New Zealand Government Bond Indices NZX calculates a range of indices to measure the performance of New Zealand government stock. In addition to the main gross return index for government stock, NZX also calculates standardised sub-indices, such as a trading bond index, and indices covering various maturity ranges: ANZ NZ All Government Stock ANZ NZ Trading Bonds ANZ 0-3 year maturities ANZ 0-5 year maturities ANZ 3-7 year maturities ANZ 1 year & longer maturities ANZ 5 year & longer maturities ANZ 7 year & longer maturities A separate index covering inflation-indexed bonds is also calculated: ANZ NZ Inflation-Indexed The ANZ NZ Government Stock gross return index tracks the movement in the New Zealand dollar value of a tax-free mutual fund invested in the government bond market selecting bonds in proportion to their relative market capitalisation weights assuming that the full amount of all coupon payments is always reinvested in the fund. The gross return index assumes that the coupon is promptly reinvested in a spread of bonds weighted according to their market value weighting at the time. Therefore, the gross index shows no tendency to fall on account of coupon payments because the index is designed to measure the total return which an investor might have received (before taxes and transactions costs) in the form of capital gains or losses and interest income. Typically, the income received in the form of a coupon payment is offset by a capital loss on the value of the underlying asset, so the gross return is normally unaffected by 2
3 the effect of such payments on the market price for the underlying asset. Note that bonds generally trade ex-coupon up to 10 days before the coupon payment date. However, the bond index calculates prices including accrued interest right up to the coupon date. The gross index effectively tracks the market value of the total portfolio of outstanding government stock. When bonds are issued at a Government Bond Tender they are added to the index on the settlement day (T+3, or three trading days after the tender date). Bonds purchased between tenders, by the Reserve Bank or EQC, are usually added to the index on the settlement day of the first subsequent tender. The adjustment is made at the prevailing market yield. 3
4 ANZ Bank Bill Indices NZX produces a range of indices to measure the performance of shorter-dated securities. Gross return indices are produced for cash, 30-day and 90-day bank bills. The gross return indices provide a measure of the cumulative increases in market value which are potentially achievable from continually rolling over, on a daily basis, a portfolio of bills based on buying, each trading day, a new issue bank bill of a 30- or 90-day maturity, depending on the index. The bank bill indices are calculated on a mark to market basis. That is, the conceptual portfolio of bills is valued at current market yields not at the purchase yields. For simplicity, bank bills within the hypothetical portfolio are valued at either the 30-, 60- or 90-day yield, depending on the number of days to maturity. Consider the 90-day bank bill index as an example. Every day, one new bill is added to the index, while one bill matures. Those bills with 30 days or less to maturity are valued at the 30 day bank bill yield, those bills with days to maturity are valued at the 60-day yield, and those bills with days to maturity are valued at the 90 day yield. Each day, a new 90 day bank bill enters the index portfolio, a bill previously valued at the 90-day yield is re-valued at the 60-day yield, a bill previously valued at the 60-day yield is re-valued at the 30-day yield, and one bill matures. The intention of the gross return index is that movements in the index during any period should reflect the return obtained on a representative portfolio of bills held at the beginning of the period, with the proceeds from maturing bills in the portfolio being reinvested in the same type of security each day. 4
5 ANZ Corporate Bond Indices The ANZ New Zealand Corporate Bond Indices are designed to supplement the ANZ Government Bond and Bank Bill Indices. NZX calculates two corporate bond indices: ANZ A Grade Corporate Bond Index (A-/ A3 and above) ANZ Investment Grade Corporate Bond Index (BBB-/ Baa3 and above) Composite government & corporate indices are also calculated: ANZ Composite A Grade Bond Index ANZ Composite Investment Grade Bond Index Index Calculation The corporate bond indices are calculated in the same way as the government bond indices. Corporate bonds satisfying certain criteria are added to a portfolio in proportion to the total market value on issue for each bond. Coupons received are likewise reinvested into all the bonds in the portfolio in proportion to the total market value on issue for each bond. Since each index measures gross returns (capital movements plus income), their value shows no tendency to decline sharply around coupon dates. Pricing NZX receives spread to swap data for each bond in the indices from the New Zealand Financial Markets Association (NZFMA) daily. A swap curve is created from the swap rates. The average spread is added to the rate from the swap curve to get the yield for each bond in the indices. Both the spread and swap rates are updated on a daily basis. If spread data is unavailable from the NZFMA, NZX indices will poll a range of banks and dealers via phone to gather spread data. The average rate will be used as the spread rate in this instance. Index Criteria Securities must be issued in $NZ into the NZ domestic market (EuroKiwis and Samurais are excluded.) 5
6 All securities must bear fixed rates of interest Securities may be senior debt, subordinated debt or capital notes. Collateralised Debt Obligations are excluded. The issue must be reasonably available for purchase by a range of investors. A security issued by private placement will usually be required to be well spread across a minimum of five unique institutional investors. Where securities have dual maturity dates or callable/putable features, they will be priced to the first maturity date or call/put date, as is market convention. When a new tranche of corporate bonds is issued that satisfies the requirements of the index, it will be added to the portfolio at the end of the first month following the issue. Issues must have settled at least 5 days prior to the month end to be added to the index at the end of that month. Issues with a settlement date less than 5 days before the end of a month, will be added to the index at the end of the next month provided they meet all of the requirements of the index. When a tranche is issued over a range of dates, it will be entered upon the first available month end if sufficient volume has been issued to that date to see it comply. When bonds are redeemed by the issuer, the appropriate adjustment will be made to its face value at the end of the first month following redemption. ANZ Corporate Bond Indices: ANZ A Grade Corporate Bond Index Underlying credit rating of issuer or security issued (where a security is specifically rated) must be A- or better (Standard and Poor's) or A3 or better (Moody's). Minimum issue size: $NZ50 million. ANZ Investment Grade Corporate Bond Index Underlying credit rating of issuer or security issued must be BBB- or above (Standard and Poor's) or Baa3 or above (Moody's). Minimum issue size: $NZ50 million. 6
7 ANZ Composite Government & Corporate Bond Indices: ANZ Composite A Grade Bond Index An index of all bonds eligible for inclusion in the A Grade Corporate Bond Index and the Government Bond index, weighted according to market capitalisation. ANZ Composite Investment Grade Index An index of all bonds eligible for inclusion in the Investment Grade corporate bond index and the Government Bond Index, weighted according to market capitalisation. 7
8 ANZ Local Authority Bond Index The ANZ New Zealand Local Authority Bond Index was developed jointly by NZX and ANZ Bank New Zealand in response to feedback from interested parties in an index that tracks the performance of local authority bonds. The ANZ Local Authority Bond Index is designed to supplement the ANZ Corporate Bond Indices. Local authority bonds are debt securities issued in New Zealand dollars, by a local authority in order to raise capital for its budget. NZX calculates the ANZ Local Authority Bond Index: The index will be calculated by NZX. The index will be named: ANZ Local Authority Bond Index Index Calculation The ANZ Local Authority Bond Index is calculated in the same way as the ANZ Corporate Bond Indices and ANZ Kauri Bond Indices. Local authority bonds satisfying certain criteria are added to a portfolio in proportion to the total market value on issue for each bond. Coupons received are likewise reinvested into all the bonds in the portfolio in proportion to the total market value on issue for each bond. Since each index measures gross returns (capital movements plus income), their value shows no tendency to decline sharply around coupon dates. Pricing NZX receives spread to swap data for each bond in the indices from the New Zealand Financial Markets Association (NZFMA) daily. A swap curve is created from the swap rates. The average spread is added to the rate from the swap curve to get the yield for each bond in the indices. Both the spread and swap rates are updated on a daily basis. If spread data is unavailable from the NZFMA, NZX indices will poll a range of banks and dealers via phone to gather spread data. The average rate will be used as the spread rate in this instance. 8
9 Index Criteria Securities must be issued in $NZ into the NZ domestic market. And must be issued by a local authority or a Council Owned Organisation (COO) as defined by the Local Government Act All securities must bear fixed rates of interest Securities may be senior debt The issue must be reasonably available for purchase by a range of investors. Where securities have dual maturity dates or callable/putable features; they will be priced to the first maturity date or call/put date, as is market convention. When a new tranche of bonds is issued that satisfies the requirements of the index, it will be added to the portfolio at the end of the first month following the issue. Issues must have settled at least 5 days prior to the month end to be added to the index at the end of that month. Issues with a settlement date less than 5 days before the end of a month will be added to the index at the end of the next month - provided they meet all of the requirements of the index. When a tranche is issued over a range of dates, it will be entered upon the first available month end if sufficient volume has been issued to that date to see it comply. When bonds are redeemed by the issuer, the appropriate adjustment will be made to its face value at the end of the first month following redemption. ANZ Local Authority Bond Index Underlying credit rating of issuer or security issued (where a security is specifically rated) must be A-or better (Standard and Poor's) or A3 or better (Moody's) or A- or better (Fitch) Minimum issue size: $NZ50 million. 9
10 ANZ Swap Indices Methodology NZX calculates seven Benchmark Swap Indices and six Aggregate Indices Each Benchmark Index represents the return of an individual swap maturity: ANZ 1 Year Swap Index ANZ 2 Year Swap Index ANZ 3 Year Swap Index ANZ 4 Year Swap Index ANZ 5 Year Swap Index ANZ 7 Year Swap Index ANZ 10 Year Swap Index Each Aggregate Index represents the average return of two or more of the Benchmark Indices: ANZ All Swaps Index (1Y 10Y incl.) ANZ Short End Swap Index (1Y, 2Y & 3Y) ANZ Short-Mid Curve Swap Index (1Y 5Y incl.) ANZ Mid Curve Swap Index (3Y, 5Y & 7Y) ANZ Mid-Long End Swap Index (5Y, 7Y & 10Y) ANZ Long End Swap Index (7Y & 10Y) The Aggregate Indices will be equally weighted averages of the underlying Benchmark Indices. The Aggregate Indices will be equally weighted averages of the underlying Benchmark Indices. Index Construction For each maturity in each index, the index replicates the return of a position in a receiver swap, plus a cash deposit at 3 month BKBM. Index Return = Receiver Swap + 3 Month BKBM deposit As the floating payments on the cash deposit would cancel out the floating leg of the swap, the return of each index replicates the semiannual payments from the fixed leg, plus a principal repayment at maturity, i.e. the index replicates a semi-annual bond, with coupon equal to the market swap rate for that maturity. 10
11 Rebalancing Rebalancing occurs at the end of the day on the last New Zealand trading day of each month (observing Wellington and Auckland holidays). Rebalancing replicates terminating the underlying positions at market value and replacing them with new par swaps and cash deposits. On the rebalance date, immediately prior to rebalancing, each swap is one month shorter than at inception. For example, for the 2 Year Swap Index, rebalancing replicates terminating the original 2 year swap and deposit (both now having 1 year 11 month maturity) and investing the proceeds in a new 2 year par swap and 2 year deposit. Return Calculation Each day, the value of each index equals the value of the index at last rebalance plus the percentage change in present value of the replicated swap(s) and deposit(s). The present value calculations use a curve built from the OCR; 1 month to 6 month bank bills; and 1 year to 5 year, 7 year and 10 year swaps. The curve uses linear interpolation on semi-annual zero coupon rates. Yield, Duration and Modified Duration are also calculated for each index 11
12 ANZ Kauri Bond Indices The ANZ Kauri Bond Indices were developed jointly by NZX and ANZ Bank New Zealand in response to feedback from investors for this rapidly growing market. The ANZ New Zealand Kauri Bond Indices are designed to supplement the ANZ Corporate Bond Indices. Kauri Bonds are debt securities issued in New Zealand dollars, by non-resident issuers. NZX calculates both a Kauri Bond Index and a Composite Government and Kauri Index: ANZ Kauri Bond Index ANZ Composite Kauri Bond Index Index Calculation The Kauri Bond Indices are calculated in the same way as the Corporate Bond Indices. Kauri bonds satisfying certain criteria are added to a portfolio in proportion to the total market value on issue for each bond. Coupons received are likewise reinvested into all the bonds in the portfolio in proportion to the total market value on issue for each bond. Since each index measures gross returns (capital movements plus income), their value shows no tendency to decline sharply around coupon dates. Pricing NZX receives spread to swap data for each bond in the indices from the New Zealand Financial Markets Association (NZFMA). A swap curve is created from the swap rates daily. The average spread is added to the rate from the swap curve to get the yield for each bond in the indices. Both the spread and swap rates are updated on a daily basis. If spread data is unavailable from the NZFMA, NZX indices will poll a range of banks and dealers via phone to gather spread data. The average rate will be used as the spread rate in this instance. 12
13 Index Criteria Securities must be issued in $NZ into the NZ domestic market by Supranational, Sovereign/Semi Government and Agency Issuers that are accepted by The Reserve Bank of NZ as repo eligible securities under the Official Reverse Repo Facility. All securities must bear fixed rates of interest. The issue must be reasonably available for purchase by a range of investors. Where securities have dual maturity dates or callable/putable features, they will be priced to the first maturity date or call/put date, as is market convention. When a new tranche of kauri bonds is issued that satisfies the requirements of the index, it will be added to the portfolio at the end of the first month following the issue. Issues must have settled at least 5 days prior to the month end to be added to the index at the end of that month. Issues with a settlement date less than 5 days before the end of a month, will be added to the index at the end of the next month provided they meet all of the requirements of the index. When a tranche is issued over a range of dates, it will be entered upon the first available month end if sufficient volume has been issued to that date to see it comply. When bonds are redeemed by the issuer, the appropriate adjustment will be made to its face value at the end of the first month following redemption. ANZ Kauri Bond Index: Minimum issue size: $NZ100 million. ANZ Composite Kauri Bond Index: An index of all bonds eligible for inclusion in the Kauri Bond Index and the Government Bond index, weighted according to market capitalisation. 13
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