TECHNICAL DESCRIPTION OF FEDERAL TREASURY NOTES
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2 TECHNICAL DESCRIPTION OF FEDERAL TREASURY NOTES 1. INTRODUCTION Federal Treasury Notes (PAGAFES) were dollar-denominated credit certificates which obliged the Federal Government to pay a sum in local currency equivalent to the value of the foreign currency on a specified date. The equivalent amount was calculated using the controlled equilibrium exchange rate published in the Federal Official Gazette (DOF, for its acronym in Spanish) on the working day immediately prior to payment. The certificates belonged to a family of zero-coupon bonds; in other words they traded at a discount (below their nominal value), did not pay interest during their life, and the face value was settled at maturity. The instruments were issued from August 21, 1986 to November 7, DESCRIPTION 2.1 Name Federal Treasury Certificates (PAGAFES). 2.2 Face value 1,000 dollars (one thousand dollars). 2.3 Term They could be issued with any maturity as long as the maturity date coincided with a Thursday or the date replacing it in the event of a non-working day. The certificates were issued with a minimum maturity of 7 days and a maximum maturity of 364 days. 1
3 2.4 Interest payment They did not pay interest because they were zero coupon bonds. However, the interest rate was implicit in the relationship between the acquisition price, the face value of the certificate, and the maturity. 2.5 Primary placement The primary placement of these certificates was done through auctions in which participants would bid for the amount they wished to acquire and the discount rate they were willing to pay. 2.6 Secondary market There was a broad secondary market for these certificates. Direct buys/sales of these certificates took place by either quoting their price, their discount rate or their yield to maturity. However, the market convention was to quote them using their yield to maturity. Appendix 1 describes the methodology used to calculate the price of PAGAFES and convert a yield to maturity into a discount rate and vice versa. Appendix 2 shows a practical example of these calculations. 2.7 Identification The ticker symbol for PAGAFES was made up of 19 characters. The first two ("PF") identified the type of certificate, the third was a hyphen, the next five defined the week and year of issuance separated by a hyphen, the ninth was a slash separating the issuance date and the final 10 represented the maturity date, day, month and year, separated by a hyphen and using four characters for the year. An example of a ticker symbol for PAGAFES issued on January 25, 1990 with a 28-day maturity expiring on February 22, 1990, would be: PF-04-90/
4 APPENDIX 1 VALUING PAGAFES The following appendices show the methodologies generally used to value the price of PAGAFES as well as an example based on market practices. I. GENERAL METHODOLOGIES FOR VALUING PAGAFES The price of a PAGAFE could be calculated using its yield to maturity or discount rate; the final price could vary slightly depending on the number of decimals used. Based on the yield to maturity, the dollar price of a PAGAFE could be calculated using the following formula: Pd = VN r * p (1) 1 + where: P d = Dollar price of PAGAFE (rounded to 7 decimal points) VN = Dollar face value of certificate r= Yield p= Maturity of PAGAFE in days If b is the discount rate of a PAGAFE then: b = r 1 + r * p ; 1
5 solving for r: r = b (2) 1- b * p By substituting (2) in (1), we obtain the formula to calculate the dollar price of a PAGAFE based on the discount rate: P d = VN * 1- b * p Based on (1), the dollar price of PAGAFES is made up of one element: the present value (face value) of the principal (VN). To calculate the price in pesos P p, the price P d in dollars had to be multiplied by the controlled equilibrium exchange rate published in the Official Federal Gazette the date prior to maturity (TCp-1) or: P p= P d* TCp-1 2
6 APPENDIX 2 EXAMPLE OF HOW PAGAFES WERE PLACED 1. On January 25, 1990 an investor bought PAGAFES with the following features: Face value: 1,000 dollars Placement date: January 25, 1990 Maturity date: February 22, 1990 Days to maturity: 28 days Let us assume that the investor bought the certificates at an annual yield of 14.50% in dollars. To calculate the price the transaction would have to be settled at, the investor had two options: a) calculate the present value of the principal using the yield to maturity, or b) calculate the price using the discount rate the yield provided (see Appendix 1). a) With a yield of 14.50%, the dollar Price at which the certificate would be settled was: P = * 28 = = b) The discount rate equivalent to a 14.50% yield is: d= * =
7 Based on this discount rate (14.34%), the Price at which the investor had to settle each of the P A G A F E S acquired could be determinated. The greater the number of decimals considered in the calculations, the lesser the Price difference *28 P 1000* * dollars Applying the controlled equilibrium exchange rate to the January 25, 1990 placement of $ pesos per dollar (published the day before in the DOF), the peso amount paid for each PAGAFE was: P = $ * dollars = $2, If the controlled equilibrium exchange rate for February 22, 1990 (published in the DOF of February 21, 1990) was $ pesos per dollar, at maturity, the investor would receive 1,000*$2.6980=$2, for each PAGAFE acquired. 1 As of January 1, 1993 a new monetary unit called new pesos was introduced in Mexico. The new peso denomination eventually gave way to the peso unit currently used (2010). The current peso unit or new peso is equivalent to one thousand (1,000) old pesos. In other words, as compared with the exchange rate shown in the example applied on February of $2,698 (two thousand six hundred and ninety eight pesos), the equivalent in current pesos would be $2.698 (two pesos six hundred and ninety eight cents). 4
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