Disclaimer: This technical note is not intended to substitute its original version in Spanish for any legal purpose. It is intended solely for

Transcription

1 Disclaimer: This technical note is not intended to substitute its original version in Spanish for any legal purpose. It is intended solely for guidance and didactic use.

2 Technical Description of Bonos de Desarrollo del Gobierno Federal con tasa de interés fija (BONOS) (Mexican Federal Government Development Bonds with a Fixed Interest Rate ) 1. INTRODUCTION Bonos de Desarrollo del Gobierno Federal con tasa de interés fija (Mexican Federal Government Development Bonds with a Fixed Interest Rate, BONOS) are part of the newest set of government securities recently made available to investors. These securities are issued for terms longer than one year, pay coupons every six months and, unlike BONDES, pay an interest rate determined upon issuance that remains fixed during the life of the instrument. What follows is a detailed technical description of these securities. 2. DESCRIPTION 2.1 Name Bonos de Desarrollo del Gobierno Federal con tasa de interés fija (BONOS, Mexican Federal Government Development Bonds with a Fixed Interest Rate) 2.2 Face value 100 pesos (one hundred pesos). 2.3 Term The securities can be issued for any term, as long as this term is a multiple of 182 days. Nevertheless, lately, these securities have been issued for and 30-year terms. 2.4 Interest rate period These securities pay interest every six months; that is, every 182 days or on the banking business day that substitutes this date in the event of a holiday. 2.5 Interest rate The interest rate paid is fixed by the federal government upon issuance of the securities and is specified to investors in the auction announcement and in the notices that are published every time there is a new securities series. 1

3 2.5.1 Interest payments Interest is paid at the end of the payment period, taking into account the days effectively elapsed among the payment dates and based on a 360-day year. Where, I J VN Nj * TC * 360 I j TC VN N j = Interest to be paid at the end of period J = Annual coupon interest rate = Face Value of the security in pesos = Coupon term in days 2

4 2.6 Primary issuance The primary issue is carried out through auctions, where participants present their bids for the amount they want to purchase and the price they are willing to pay. The rules for these auctions can be found in Banco de México s Circular 5/2012, which is addressed to credit institutions, brokerage houses, mutual funds, pension funds and Financiera Rural. It is important to point out that often the federal government offers in its primary auction securities originally issued before their auction dates. In these cases, auctions are carried out at a clean price (with no accrued interest). This means that investors who buy these securities have to add the accrued interest of the current coupon to the allotted price that results from the auction according to the following formula: I accj VN * d * TC 360 Where, I accj = Interest accrued (rounded up to 12 decimal points) during period J d = Number of days accrued between the issue date or last interest payment (J-1), Whichever applies and the valuation date. A practical example can be found in appendix 2 3

5 2.7 Secondary market In Mexico, there is a broad secondary market for these securities. Today, it is possible to carry out outright sale and repo transactions as well as securities lending transactions. BONOS can also be used as underlying assets in derivative markets (futures and options), although up to now they have never been used as such. Direct transactions can be made by quoting either their price or yield to maturity. However, the current market convention is to quote them by their yield to maturity. Appendix 1 describes the methodology used as a market convention to calculate the price and yield to maturity of BONOS. Appendix 2 shows a practical example of how to calculate the price of these securities from the expected yield to maturity. 2.8 Security identification Since each issue of these securities has a different interest rate from inception to maturity, BONOS are not fungible unless they have exactly the same interest rate. This is the reason the series is composed of eight characters. The first one identify the security ( M ); second a blank space and the remaining six, the bond s maturity date (year, month and day). Example of series for BONOS issued on January 27, 2000 for a 3-year term (1092 days) maturing January 23, 2003: M

6 APPENDIX 1 BONOS VALUATION There are several ways of quoting and valuing these securities in the market. This appendix shows a general methodology for pricing BONOS. I. GENERAL VALUATION METHODOLOGY FOR BONOS The general formula to value a BONO is the following: K P= C j * Fj FK * VN C1 j1 N1 d (1) Where: P = Clean BONO price (rounded to 5 decimal points) VN = Face value of the security K = Number of coupons to be paid (including the current one) d = Number of days accrued in the current coupon period N j = Term in days of coupon j C j = Coupon j, which is calculated the following way: C j N j * TC VN * 360 TC = Annual interest rate of the coupon 5

7 F j = Discount factor for cash flow j, calculated according to the following formula: r j = relevant interest rate for discounting coupon J In formula (1), the price for the BONO is comprised of three different elements: the present value of coupons, the present value of the principal, and the accrued interest from the current coupon. Each coupon and the principal are discounted at a different interest rate; thus, it is necessary to know or be able to estimate an interest rate for each discount factor. 6

8 II. DETERMINATION OF A BONO'S CLEAN PRICE THROUGH THE YIELD TO MATURITY. There are many markets that quote securities with BONO s features according to their yield to maturity. A BONO's yield to maturity can be defined as the yield an investor would obtain by holding the security until maturity. To determine the price of a BONO, once its yield to maturity is known, all the security's cash flows (coupons and Principal) must be discounted at the same interest rate r J. By knowing the security's yield to maturity, the general formula (1) can be enormously simplified, because in the process of obtaining the present value of the different cash flows, interest rates rj become the same in all discount factors. Once the yield to maturity is known, and assuming that all coupon terms in days are the same, the general formula can be expressed as follows: 1 C C R R P K 1 1 R 1 R 1 R 1 d VN K 1 d C 182 (2) where: C VN 182* TC * R r 360 r = Annual yield to maturity 7

9 APPENDIX 2 A PRACTICAL EXAMPLE 1. On January 27, 2000, the Mexican federal government issues BONOS with the following characteristics: Face value: 100 pesos Issue date: January 27, 2000 Maturity date: January 23, 2003 Term: 1092 days Coupon: 18% Days to maturity: 182 days 2. On February 15, 2000, the federal government auctions BONOS originally issued on January 27, The payment date for the auction s result is February 17. On that date, 1071 days will remain until maturity and 21 days will have elapsed for the first coupon payment period. The security is auctioned the same way it was issued; that is, at a clean price (not including accrued interest). In order to calculate the auction results payments, the accrued interest of the first coupon must be added to the allotment price. For example, assuming that an investor wants to participate in an auction of these securities, presenting a bid that equals an annual return of 19%, in order to find the corresponding clean price, equation (2) from Appendix 1 must be used: P * * / * $

10 The price of will be the bid that the investor submits for each security sought for purchase. Assuming that the investor receives assignment for this bid, on February 17, the investor will have to pay for each bond. 21* I acc * $