Brady Bonds Jose A. Boza David Marquez Elton Festari Rahul Bakshi
Presentation Outline • • Brady Bond Introduction Citibank Requirements Mexican Bond Calculations Venezuela Bond Calculations Costa Rica Bond Calculations Country Risk Using Brady Bonds Recommendations Questions
Brady Bonds • Securities that have resulted from the exchange of commercial bank loans, sometimes defaulted loans, into new bonds. • Purpose – To replace the sovereign debt of developing countries (debt service reduction agreement). • Par – loans exchanged for fixed rate bonds, issued with below-market interest rates (issued at face value) • Discount – floating rate bonds, issued with market interest rates (issued below face value).
Citibank Requirements • Should company buy Mexican par or discount bonds? • Should company buy Venezuelan par or discount bonds? • Fair opening price for Costa Rican bonds • Should Citibank sell its Mexican bonds in 1996? • How can Citibank hedge its Mexican exposure?
Mexico Bonds – 1990 Issue • Bond characteristics – 30 year maturity – 30 -yr US treasury bond collateral for face value – 3 coupon payments (18 months) collateral
Mexico Bonds – 1990 Issue • Par bonds – Fixed coupon of 6. 25 % • Discount bonds – LIBOR plus 13/16 %
Mexico Bond Calculations • Data required – YTM U. S. – 7. 925% – YTM Mexico – 15% – LIBOR – 8. 5% – Default probability for Mexico – 5. 5%
Mexico Bond Calculations • Par bond NPV • P = $38. 08
Mexico Bond Calculations • Discount bond NPV • P = $51. 77 Recommendation: Buy Par bonds.
Venezuela Bonds – 1990 Issue • Bond characteristics – 30 year maturity – 30 -yr US treasury bond collateral for face value – 2. 3 (14 months) coupon payments collateral
Venezuela Bonds – 1990 Issue • Par bonds – Fixed coupon of 6. 75 % • Discount bonds – LIBOR plus 13/16 %
Venezuela Bond Calculations • Data required. – YTM U. S. – 7. 925% – YTM Venezuela – 14% – LIBOR – 8. 5% – Default probability Venezuela – 5%
Venezuela Bond Calculations • Par bond NPV • P = $40. 52
Venezuela Bond Calculations • Discount bond NPV • P = $52. 06 Recommendation: Buy Par Bonds.
Costa Rica Bonds – 1990 Issue • Bond characteristics – Principal Series A – 20 year maturity – No collateral for face value – 3 coupon payments collateral
Costa Rica Bond Calculations • Data required. – YTM U. S. – 7% – YTM Costa Rica – 12. 5% – Default probability Costa Rica – 5%
Costa Rica Bond Calculations • Bond NPV • P = $32. 45
1996 – Sell Mexican Bonds? • Ability to sell at $71. 50 • Valuation (NPV) at $58. 69 • D = [(1 + ytm) / ytm] - [(1 + ytm) + yrs * (i - ytm)] / [i * [(1 + ytm) ^yrs - 1] + i] • Duration – Less than 6 years (5. 93) • Duration = the average (cash-weighted) term-to-maturity of a bond. • Yes, sell.
Mexican Par Bonds Useful Diversification Tool? • US Rate DVBP – The price rise (fall) of the bond for a 100 basis point shift downward in the US yield curve. • DVBP for Mexican Par Bonds = 8. 48 • High negative correlation b/t US and Mexican Par Brady Bonds • Yes, good diversification tool.
Method to Determine Country Risk • State Variable – Provides an estimate of country risk embedded in the bond – higher state value, the lower risk of the bond. • State Variable for Mexican Brady Bonds. 001210. • SD =. 11895 (relatively high) • YTM(Brady Bond) – YTM(Risk Free) = Country Risk
Hedging USD 600 Million of Mexican Brady par Bonds • Options: – Put Options on Mexican Stock Exchange – Put Options on CME’s options for Mexican par Brady Bonds
Forward Looking – Mexico’s Country Risk • Mexico has industries growing in Tele. Com and Media • Growing correlation with US Economy • Some political risks with upcoming elections in 2002 • Ability for economic growth in 2002 and 2003 • Retiring Brady Bonds and replacing with US $1. 5 bn 30 -yr bond at 9% (frees up US Treasury assets held by Mexico)
QUESTIONS?
Скачать презентацию Brady Bonds Jose A Boza David Marquez Elton
dc7cb639564494a4b1900d67b145b6a8.ppt