FGN Bond Index. FMDQ Methodology Paper Version 1.0 January FMDQ FGN Bond Index 1.

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1 FGN Bond Index FMDQ Methodology Paper Version 1.0 January 2014 FMDQ FGN Bond Index 1.

2 Contents 1.0 Introduction FMDQ FGN Bond Index Characteristics Inception Date Index Rebalancing Trading, Settlement, and Transaction Costs Price Sources Assigning Bonds to the FMDQ FGN Bond Index Security Inclusion Exclusion/Removal Implementation of Changes in the Portfolio at Rebalancing Date Appendix... 7 FMDQ FGN Bond Index 2.

3 1.0 Introduction FMDQ has a mission to empower the OTC financial markets to be innovative and credible, in support of the Nigerian economy. This would be achieved by providing market participants with world class market governance and market development service. In line with its mission, FMDQ launched the FMDQ FGN Bond Index, a benchmark index that is transparent and representative of activities in the two way quote FGN bond market. The FMDQ FGN Bond Index will track the performance of the most liquid FGN bonds across specified duration buckets. The FMDQ FGN Bond Index is created to provide bond investors with accurate benchmarks for performance measurement and to offer building blocks for portfolio construction. The index provides an accurate, broad depiction of the performance and fundamental characteristics of the FGN bond market. There are three key features underlying the design and construction of the FMDQ FGN Bond Index: Transparent and Objective Rules: The construction of the index is governed by a clear and transparent set of well documented rules for security selection and exclusion, as well as reconstitution. Comprehensive Market Coverage and Investability: The Index is broad and inclusive enough to incorporate the prominent characteristics of active managers portfolios and fulfil a marketmonitoring function while still maintaining a focus on investability. Access to Index level Data and Metrics: FMDQ makes its FGN Bond Index data available to all users through its website and newspaper publications. FMDQ FGN Bond Index 3.

4 2.0 FMDQ FGN Bond Index Characteristics The FMDQ FGN Bond index is a total return fixed income index covering the Nigerian government domestic bond market which constitutes circa 95% of the Nigerian fixed income market. The index has the following three (3) modified duration sub indices: 1< 3 bucket 3 5 bucket > 5 bucket The sub index in which each bond is assigned depends on the modified duration of the respective bond on the first business day of the month. The total return index and sub indices are calculated daily. They take into account the price changes, interest accrual and daily return on investment of the received coupon of each bond. 2.1 Inception Date The FMDQ FGN Bond Index has a commencement date of December 31, Total return series will be made available from inception date forward. 2.2 Index Rebalancing Rebalancing is required when there is an issue to be added or dropped from the index as a result of any of the following events: When there is a new issue When there is a re opening of a bond Where a bond no longer meets the eligibility criteria: duration falls below one The index is rebalanced once per month to ensure the index accurately reflects the available market supply of liquid bonds. The new universe of bonds is simply the previous month s composition taking into account the new additions and drops triggered by the inclusion/exclusion criteria and liquidity assessments for the index. These characteristics stay constant throughout the month. All securities must settle before the last business day of the month in order to be eligible to be included in the rebalanced index for the following month. A preview portfolio containing retained old issues and new bonds is tracked for two days before changes to the portfolio are implemented. The portfolio as of the first business day of each month reflects all changes. 2.3 Trading, Settlement, and Transaction Costs Trading and settlement of these securities follow market conventions. The index does not take transaction costs into account. Bid side prices are used for the daily bond index calculations and offerside for adding new bonds to the index. FMDQ FGN Bond Index 4.

5 2.4 Price Sources The prices used for the calculation of the index are based on data sourced from the FMDQ Daily Quotations List (DQL). FMDQ DQL closing prices are derived by taking the mode of the selection of quotes. Where the selection results in a dual modal price, the better bid (the higher of the two prices) is selected as the closing price and used in the index. 3.0 Assigning Bonds to the FMDQ FGN Bond Index At each rebalancing date, security inclusion/removal rules for the index are applied based on the criteria described below. 3.1 Security Inclusion The FMDQ FGN Bond Index is designed to provide diversified exposure to Naira denominated sovereign debt through the most liquid issues in the market. The index methodology balances the need for adequate market coverage with easy replication and diversification. This is achieved through exclusion of smaller issues that are illiquid and impose wider spreads. The following eligibility rules are applied: Only bonds issued by the Federal Government of Nigeria (sovereign bonds) are included in the index. Only Naira denominated bonds are included in the index. Only fixed rate coupon bonds are included in the index. All securities must have a minimum of 24 months' maturity or greater at the time of issuance. A minimum of N100 billion in outstanding value for the issue is required for a bond to be included in the index. All securities must have a minimum modified duration of Exclusion/Removal Developmental and Agency (quasi sovereign) bonds backed by the Federal Government of Nigeria are not included in the index. Bonds with embedded options, such as calls and puts, are not included. Eurobond issues are not included. Bonds are removed from the index after the close of the last business day of the month if the modified duration falls below one and/or outstanding value falls below N100.00bn. FMDQ FGN Bond Index 5.

6 4.0 Implementation of Changes in the Portfolio at Rebalancing Date The research is made two (2) business days before the last business day of the month regarding which bonds will be part of the index in the next period. This is in accordance with the index scheme on the issue volume and residual life of the bonds which must on the first trading day of the new month have a full year or more to run. New issues are brought in at the closing price of the last trading day of the previous month. Security reclassification due to shortenings are removed and included by way of purchase or sale at the respective closing price on the last trading day of the previous month. A Shortener is where a bond is moved, at its closing price, from one Modified duration sub index to a shorter Modified duration sub index. This occurs after the close of the last business day of the previous month when the remaining lifetime of the bond is within this shorter life band index. After the portfolio changes have been made, any removed or newly included bonds will be announced to the market one day before the last business day of the month. FMDQ FGN Bond Index 6.

7 5.0 Appendix Index Calculation Formulae Indexn = (Pn/Pn 1)*Indexn 1 Where : P n = Price on trading day P n-1 = Price on the previous trading day Index n = Index of trading day Index n-1 = Index of the previous trading day Daily Coupon Return is calculated for each bond as follows: a. R n= P n*1/ 365*ON b. P n= P n-1+(p n-1*1/ 365*ON) Where: R n = Return on trading day R n-1= Return on previous trading day P n = Principal (Coupon Returns) on trading day P n-1 = Principal (Coupon Returns) on previous trading day ON = Overnight Rate - Use 366 days if a leap year FMDQ FGN Bond Index 7.