Fixed Income Analysis and Valuation

• This study guide covers fixed income analysis and valuation, including financial instruments, time value of money, bond characteristics, and risk management strategies.

Financial Instruments and Markets

• A financial asset is how an issuer finances itself, granting its holder certain rights to be met in the future.
• A financial asset represents a debt obligation for the issuer, and wealth for its holder.
• Fixed income assets promise a future ROI of certain cash flows specified by the issuer before the issue date.
• A zero-coupon security or bond involves one cash flow, while multiple cash flows or coupons with the same value are bonds and obligations.

Financial Investments Factors

• Risk of financial investment depends on having capital and accrued interest returned.
• Capital is returned on the redemption date.
• Interest is paid in a fixed or variable amount dependent on a fixed reference.
• With equities, investments are regained by selling shares, but at an unknown price.
• Equities may or may not pay dividends, and dividend policy can change.

Features of Fixed Income

• Fixed income are marketable securities issued to raise funds directly from the public.
• The issuer pays interest and returns the principal according to pre-set deadlines.
• Issuers agree to pay a coupon and repay the principal at a fixed time, or to make a periodic interest payment and a single redemption upon maturity.
• Holders are creditors of the issuing company, not partners, and have economic rights, not political rights.
• Issuers can choose issue and redemption dates, coupon interest rate type and frequency, nominal value, issue price, redemption value, issue terms, and guarantees.
• Common issue traits include fixed coupons as a percentage of their nominal value; annually matching maturity; single redemption at par/100% nominal.

Important Fixed Income Terms

• Issue price: Effective price of each security at subscription, differing from nominal value based on discount or premium.
• Redemption price: Amount received at repayment, often coinciding with the nominal value as per issue terms.
• Redemption: Return of capital at maturity, possibly agreed for earlier, either fully or partially, at the issuer's or investor's option.
• Early partial redemption by the issuer is done by draw or by reducing the security's nominal value.
• Repayment premium: difference between redemption amount and nominal value, where the issuer pays an amount higher than the nominal value of the securities on the redemption date.
• Coupons: periodic payments (quarterly, half-yearly, annual) of agreed interest in the issue.
• Accrued interest: earned but unpaid coupon part between two coupon payments. Amount added ex-coupon to the bond's secondary market price.
• Zero-coupon issues: securities paying interest at maturity, along with principal, with maturities of short, medium or long term.

Fixed Income Issuers

• National treasuries, autonomous communities, local corporations, other public organization and supranational organizations are main issuers on the public sector.
• Banks, savings banks, insurance companies, chemical, pharamaceutical, fossil fuels, construction, real estate, food, beverages, utilities, transportation and communication companies are main issuers on the private sector.
• Discounted issues, such as Treasure Bills and commercial paper, are short-term with interest discounted at purchase.
• Traditionally, sovereigns dominated fixed income, financial institutions and corporates have increased debt issuance in recent years.
• Laws require issuers to give sufficient, balanced information to investors before decisions, including an issue prospectus and leaflet.
• The prospectus, whether single document or combined, contains summarized issuer and securities information.

Valuing Fixed Income

• Value is the present value of all future cash flows, weighted by risk.
• Bond percentage at nominal value is the Price of a bond.
• Total price includes accrued, uncollected interest.
• The Total price/dirty price is the effective amount paid for a bond.
• Clean/ex-coupon price subtracts accrued interest from total price.

Fixed Income Conventions

• The "Bond basis" is the day count convention for calculating bond prices, varying by asset type and market.
• Common Bond Basis are 30/360 (Eurobonds, Swiss, Germans), Actual/Actual (American, European Bonds), Actual/365 (Public debt) and Actual/360, 365/365 (Other).
• "Fixed income is not fixed" since its yield is truly fixed only if held to maturity.
• Types of fixed income securities differ by issuer(public/private, domestic/international), explicit/implicit or not returns(zero-coupon), type if remuneration(fixed/indexed), repayment scheme, type of option if any.

Fixed Income Markets

• Assets with less than 12 months until maturity are in the money market; if over 1 year, they are in the capital markets.
• The main money market assets are treasury bills and promissory notes.
• Numerous savings deposits are less specialized substitutes.
• Interbank deposits are important monetary assets correlating with the interbank money market acting as collateral in ECB auctions.

Interbank Deposit Market Main Features

• Trading is wholesale in high nominal values for authorized entities only.
• Participants exchange deposits for 1 day to a year.
• Trading is done between market members or intermediaries.
• Transactions use TARGET2 for execution, clearing, and settlement.
• Settlements made through credit institutions' treasury accounts at central banks.
• Membership available to credit institutions authorized by the central bank within its criteria.
• Non-transferable deposits act as loans with established terms with both depositor and depository institutions unchanged until maturity.
• Intervention by a central bank materializes in "repos" or "simultaneous" operations, but this has not prevented the interbank market from continuing to maintain a high level of activity

Aspects Of EURIBOR

• Is a fixing based on expert quotes, representing euro interbank deposit offers of top institutions.
• It is the Euro reference interest rate.
• Periods are 1 week; monthly of 1 to 12 months.
• Its value date is two business days later, value calculated on the Actual/360 basis.
• Contributor Panel members must be EBF or ICA members, with the capacity to manage turbulence, good credit rating, and report quarterly to central banks/ECB; obligated to quote daily rates and EONIA data to the ECB.

EONIA details

• Is the effective reference rate of overnight euro interbank deposits, calculated daily, and public with two decimal places on an Actual/360 basis between 6:45 and 7:00 p.m.
• The ECB receives the total transaction volume data overnight, as well as the weighted average interest rate for send to the ECB overnight

Other Information

• Eurolibor is the past London market Euro rate. Details are Seven-day to 12m rates, calculated on Actual/360 basis, 2 business days value. €STR reflects the wholesale overnight borrowing costs of euro area banks.

ECB in Euro Market

• ECB aims to guarantee price stability w/ HICP under 2%.
• Achieved by setting the Official Euro Rate and intervening through Monetary Policy Instruments.
• Monetary policy is implemented through money market interventions in interbank deposits and short-term State Debt to level for interest rates with so-called operations from the ECB, controlling rates, managing liquidity, and informing agents is their stance, with 1.)Main, 2.)Longer-term, 3.)Fine-tuning and 4.)Structural operation categories.
• Main operations involve injecting liquidity through weekly standard tenders lasting one week, at the marginal interest rate. Entities contact natl'l central bank for one million+ euro bids, where ECB decides Fixed Rate (pro rata if needed) or minimum Variable Rate for tenders allocation.
• Financial crisis lead to operations from the ECB with up to 3-year maturity.
• There are operations to management liquidity through either injection/drainage to smooth market. -The ECB needs to ensure the market stability

Balance Sheet Info

• Discount interest rate is the most usual expression of the time value of money. The time value expresses the difference between the Present Value of the monetary units invested and their Future Value.
• Reductions by ECB (temporary reduction of deposit remuneration to 0% in summer 2012).
• Cash Reserve Ratio (CRR) is mandatory liquidity ratio that is calculated monthly based on a portion of deposits owed. The ECB compensates members at the rate of main financing operations.
• An increase in cash reserve ratio implies withdrawing money as increasing the cash reserve ratio
• Instruments used are open market and permanent facilities.
• The collateral assets must:Be fixed income, except those convertible into shares.
• Be rated for credit quality and registered with a central bank in the EEA, among other criteria.
• Valuation haircuts need to be applied.
• Limits on the use of credit linked straight Bonds issued by credit.

Short Term Debt

• Treasury bills are the most used instrument.
• Sold at a discount at tenders, identified by their six digit expiration date, with minimum requests of 1,000+ euro amounts.
• Price based on simple capitalization for less or longer than year terms.
• They are sold spot/forward but very same transactions apply to Bonds and Obligations.
• Other transaction options are outright (assets bought/sold outright), forward (settlement agreed by third business day following contracted day) and Sell/buy-transactions (contractions by which they do this, one for purchase and one for sale).
• Analytical Formulations involve Knowing Cash to give to buyer and seller uses: Simple or compound capitalization for bills and Zero-Coupon Bonds at discount. Number of days the amount of the price to be called"Bond basis".
• Eurobonds, Swiss and German: 30/360
• American, European Bonds: Actual Actual act act "
• Debt: Actual / 365 Actual/360, 365/365

Fixed vs Capital Markets

• Medium and long term fixed income categories for the main issue.
• Subordinated Debt better reviewed. Bellow senior are senior debt, mortgage securities, preferred shares and mortgage securitization.
• The European short-term rate (€STR) reflects the wholesale euro overnight borrowing costs of banks located in the euro area.
• ECB monitors Euro price stability. Mandate is being the guarantor.

Typology

• Increase Liquidity: Senior debt, Mortgage securities and Eurobonds.
• Bolster Capital is Subordinated debt, preferred shares and partaking shares, contingent convertible.
• Balance Sheet Turnover is Securitization.

Other Factors

• Euroclear and Clearstream are international, independent clearing and settlement systems following delivery against payment.
• Securities and Cash system work through banks.
• Euribor Euro interbank Offered Rate and other indicators is calculated as a fixing" - in a way based on quotes provided by experts. Index for many fixed" -income will index the assets the main Money Market Benchmarks will be benchmarked through way.

Key Characteristics of Fixed Income Indices

• Fixed -income index represents the cumulative value of a portfolio that invests in the secu- comprising it, with the same relative weight, from the moment when its initial capital is of CU100.
• Fixed -income index is nothing more than the measurement of the profitability of the funds at absolute, relative level.
• We will have to be defined For example mergers and changes.
• We will discuss later in the other chapters.
• Thomson Reuters Eikon code 'ITRAXX' is the brand name for the of credit default swap index products covering regions of Europe, Australia, Japan.
• They form of global.

Euribor/Libor Summary

• European average Panel: Approx 55. most active in London
• Calculation Bridge Arithmetic
• 11 a.m. GMT Decimals: Approx. 3, 5 Target Business days.
• Publication Bloomberg and Reuters: 2 D value.

Liquidity

• Is expressed, measured in EUR billions; period averages of daily positions:

• Eurosystem's net assets in gold; main relancing; longer term

• Marginal credits; fixed facilities. Non-transferable deposits.

Asset Backed Lending

• Collateral assets are the financial instruments, loans that is sold a loan.
• European The EC and must buy and sell collateral are based on adequate.
• Asset must be transferable in the euro of member state.
• European Economic Area depository

Bond and Securities Key Qualifications

• Having a defined, fixed, unconditional be denominated.
• Assets must be tradable. Receiving interest. Having a one of the following coupon is zero or linked to tax or inflation.