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百度一下 帮助Fixed Income Securities Valuation 6

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Fixed Income Securities Valuation

Part A: Credit Analysis

1. Credit Ratings

Credit rating is conducted by a ratings agency. For long-term Debt, credit rating assesses the probability of default and the magnitude of loss.

For short-term Debt, credit rating focuses on the probability of default.

Rating Information:

- Downgrade/Upgrade Watch: reduce/increase current rating by 2 notches

- Negative/Positive Outlook: reduce/increase current rating by 1 notch

- Stable Outlook: remain current rating 2. Traditional Credit Analysis

1) Analysis of a Corporate Bond

4C’s: Capacity to Pay, Collateral, Covenants, Character

- Capacity to Pay Factors: Industry Trends, Regulatory Environment, Operating and Competitive Position, Financial

Position and Source of Liquidity, Company Structure, Parent Company Support Agreements, Special Event Risk

- Ratio Analysis

Focused Aspects Ratios

Profitability ROE, ROA, Profit Margin, Asset Turnover

Short-Term Solvency Current Ratio, Acid-test, Cash Ratio

Capitalization LT Debt/(LT Debt + Equity), Total Debt/(Total Debt + Equity)

Coverage EBIT (or EBITDA) / Interest,

Funds from Operation (or Free Operating Cash Flow) / Debt Cash Flow Funds from Operation / Total Debt, (Free Operating Cash Flow + Interest) / Interest

(Free Operating Cash Flow + Interest) /(Interest + Annual Debt Principal Repayment) [DSR]

Total Debt / Discretionary Cash Flow [Debt Payback Period]

Funds from Operation / Capital Spending Requirement

Funds from Operation (FFO) = NI + Depreciation + Amortization + Deferred Income Taxes + Other Noncash Items

Discretionary Cash Flow=FFO+Decrease in Noncash Liquid Assets+Increase in Non-Debt Liquid Liabilities - Analysis of Collateral: Important to Secured Position

- Analysis of Covenants: Affirmative/Negative Covenants

- Character of Corporation: Governance, Agency Problem, Stakeholders, etc

- Corporate Governance Rating: Ownership structures and external influences, shareholder rights and stakeholder

relations, transparency and audit, board structure and effectiveness

- Special Issues for High-yield: Debt Structure, Corporate Structure, Covenants, Equity Analysis Approach 2) Analysis of an Asset-backed Security & Non-agency Mortgage-backed Security

Factors considered: Credit Quality of Collateral, Quality of Seller/Servicer (in true securitization,

servicer is simply to collect and distribute cash flows), Cash flow Stress and Payment Structure, Legal Structure

3) Analysis of Municipal Bond

Bond-security Areas Considered: limits of basic security, flow-of-funds structure, covenants ( different to corporate

bond, thus additional credit analysis is needed), priority-of-revenue claims, additional-bonds tests, other relevant covenants

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bond, thus additional credit analysis is needed), priority-of-revenue claims, additional-bonds tests, other relevant covenants

4) Analysis of Sovereign Bond

Factor Considered: Political Risk, Income and Economic Structure, Fiscal Flexibility, Public Debt

Stability, Balance of Payments Flexibility, External Debt and Liquidity

Two ratings assigned: local currency rating and foreign currency rating

3. Credit Scoring Models (TA-Total Assets)

Z = 1.2 (working capital/TA) + 1.4 (RE/TA) + 3.3 (EBIT/TA) + 0.6 (MV-E/TA) + 1.0(Sales/TA)

4. Credit Risk Models

Structural Model: based on BSM Option Pricing, probability of default directly links to volatility of asset

Reduced Form Model: directly model probability of default and downgrade

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Part B: Interest Rate Term Structure and Volatility

1. Yield Curve Shape: Positively Sloped, Flat, Negatively Sloped, Humped

Shifting of Yield Curve: Parallel Shift, Steepening and Flattening, Positive/Negative Butterfly

Constructing Theoretical Spot Rate Curve:

- Treasury Coupon Strips: easy to view but drawbacks: limited liquidity, different tax, yield-tax trade-off

- On-the-run Treasury Issues: observed yield but differential tax treatment distorts yield, gap between maturities

- On-the-run and Selected Off-the-run: Linear interpolation and Bootstrapping Methods used - All Coupon Securities and Bills: complex methodologies, adjustments for taxes

Use of Swap Curve:

- Element: Swap is used, Swap Spread = Swap Rate – Government yield on a same-maturity bond

- Reasons: No government regulation, Supply/Demand determined by market, easy comparison

more maturity points available

- Constructing: bootstrapping methodology

2. Expectation Theories

Pure Expectation Theory

- Drawback: Neglecting risks inherent in investing in bonds: uncertainty about price at the end

reinvestment risk (rate at which proceeds will be invested)

- Broadest Interpretation: investors expect the return for any investment horizon to be the same regardless of the

maturity strategy selected. But because of price different, the expected return should be different.

- Local Interpretation: return over a short-term investment horizon will be the same

- Forward Rate: break-even rate, lock-in rate, market consensus

Liquidity Preference Theory: investors will hold long-term maturities if they are compensated by a premium

Preferred Habitat Theory: investors have to be paid a premium to shift out of their preferred sector

3. Measuring Yield Curve Risk Key Rate Duration: sensitivity of portfolio’s value to the change in a particular rate

Most Popular Key Rate duration: 11 key maturities (3-mo, 1,2,3,5,7,10,15,20,25,30 –yr maturities) used

Ladder Portfolio: key rate durations for every maturity is roughly the same

Barbell Portfolio: Some maturities’ duration is significantly greater

Bullet Portfolio: one maturity’s duration is significantly greater

Part C: Bond Valuation 1. Relative Valuation

Note: Nominal Spread is spread measured relative to treasury yield curve, and zero-volatility spread and OAS are

spreads relative to treasury spot-rate curve.

OAS will be affected by different interest rate volatility assumptions.

Benchmarks

Benchmark Spread Measure Risk Treasury Yield Nominal Credit, Option, Liquidity

Spot-Rate Zero-Volatility Credit, Option, Liquidity

Spot-Rate Option Adjusted (OAS) Credit, Liquidity

Sector

(Given Credit Rating)

Yield Nominal Credit, Option, Liquidity

Spot-Rate Zero-Volatility Credit, Option, Liquidity

Spot-Rate Option Adjusted (OAS) Credit, Liquidity

Issuer-Specific Yield Nominal Option, Liquidity

Spot-Rate Zero-Volatility Option, Liquidity

Spot-Rate Option Adjusted (OAS) Liquidity

Relative Value

Benchmark Negative OAS Zero OAS Positive OAS

Treasury Market Overpriced Overpriced If Security OAS < Required OAS, Overpriced

If Security OAS = Required OAS, Fairly Priced

If Security OAS > Required OAS, Underpriced

Sector (Given Credit Rating) Overpriced Overpriced If Security OAS < Required OAS, Overpriced

If Security OAS = Required OAS, Fairly Priced

If Security OAS > Required OAS, UnderpricedIssuer Specific Overpriced Fairly Priced Underpriced

2. Absolute Valuation (Binomial Model, based on No-Arbitrage Theory)

Requirement of Interest Rate Tree:

- Consistent with both interest rate volatility assumption and interest rate model

- Observed market price for securities generated

- When a tree is used to value an on-the-run issue for benchmark, the resulting value should be arbitrage free. Pre-condition of Construction of Interest Rate Movement: Interest Rate Volatility

Pre-condition of Construction of Interest Rate Movement: Interest Rate Volatility

Call Option Value = Value of Option-free Bond – Value of Callable Bond

Option Adjusted Spread: constant spread that when added to all the 1-year rates on binomial interest tree will make

the non-arbitrage value equals to price. If modeled value is higher, add a constant OAS to adjust value downward.

Effective Duration: (V- - V+)/ 2V0 (change in yield)

Effective Convexity: (V- + V+-2 V0)/ 2V0 (change in yield) 2

Calculating Duration and Convexity using Binomial Model:

- Calculate OAS using old tree before adjusting for changes in interest rate

- When new interest rate tree is formulated, then add OAS to each one-year rate. Therefore

interest rate do not contain OAS

- Duration will take into account of changes in cash flow due to embedded option.

Put Option Value: Value of Option-free Bond- Value of Putable Bond

Floating Rate Bond: Price = Par Value

Capped Floater: higher the cap, closer the price to par

Convertible Bond:

- Traditional Analysis

Conversion Value = Market Price of Common Stock * Conversion Ratio (set by covenants) Minimum Price of Convertible Security = MAX [Conversion Value, Value as security without conversion option]

Market Conversion Price = market Price of Convertible Security/Conversion Ratio

Market Conversion Premium per Share = Market Conversion Price – Current market Price

Market Conversion Premium Ratio = Market Conversion Premium/Market Price for Common Stock

Premium Payback Period = Market Conversion Premium per Share / Favorable Income Differential per Share

Favorable Income Differential per Share = [Coupon – (Conversion Ratio * Dividend)] / Conversion Ratio - Option-Based: Value of Convertible = Straight + Call on Stock + Put on Bond – Call on Bond

- Investment Characteristics: Hybrid Security

- Assumption: Straight Value does not change over time

- Risk/Return: limited upside potential, limited downside risk

- Hard puts and soft puts: hard put means issuer must redeem the bond with cash, while soft puts issuers can

select put methods. Part D: Structured Securities Valuation

1. Mortgage-Backed Securities (MBS)

Fixed Rate, Level-Payment, Fully Amortized Mortgage

- Mortgage rate fixed, same amount payment for all period, zero balance of principal after final payment

- Servicing Fee: some basis points, a portion of mortgage rate

- Prepayments: cash flow uncertainty associated with interest rates Mortgage Pass-through Securities

- Cash Flow Characteristics: Monthly Payments of Interest, Scheduled Principal Payments, Prepayments

- Weighted Average Coupon: Weighted Average of Mortgage Rates in Each Mortgage in the Pool

- Weighted Average Coupon: Weighted Average of Mortgage Rates in Each Mortgage in the Pool

- Weighted Average Maturity: Weighted Average of Maturity of Each Mortgage

- Types: Conforming (meeting specified requirements), Non-conforming (fail to meet such standards)

- Prepayment Measurement: Single Monthly Mortality Rate (SMM) = Prepayment t / (Beginning Balancet – Scheduled Principal Payment

Conditional Prepayment Rate (CPR) = 1-(1-SMM) 12

PSA Benchmark: 100%PSA refers to if t<30, CPR = 6% (t/30), otherwise CPR = 6%

If WAM is less than original loans year, and the different is n, CPR and SMM are applicable from month n+1.

SMM = 1 – (1-%PSA * CPR) 1/12

- Factors Affecting Prepayment: prevailing mortgage rate, housing turnover, characteristics of underlying - Prepayment Risk Categorization

Contraction Risk: Falling mortgage rate resulting in lower reinvestment, shortening in term of timing

Extension Risk: Rising mortgage rate resulting lower PV of cash flow, lengthening in term of timing

2. Collateralized Mortgage Obligation: Tool to distribute prepayment unequally among investors

Sequential-Pay Tranches

- Rule of distribution: distribute cash flows to lower tranches after higher ones are fully paid off. - Total Par Value = Par Value of Collateral, Coupon Rate on All Tranches = Coupon Rate on Collateral

- Principal Pay-down Window: time between beginning and ending of principal payment of a tranche

- Average Lives of Tranches: shorter or longer than collateral.

- Protection: Higher tranches are protected against extension; lowers are protected against contraction.

Accrual Tranches (Tranche Z or Z bond)

- Interest payments to Tranche Z are diverted to pay down principal of other higher tranches - Lives of other tranches are therefore shorter.

- Tranche Z does not get any interest payment until all other tranches are paid off.

- Tranche Z does not have effect on prepayment risk.

- Tranche Z eliminates reinvestment risk until all other tranches are paid off.

Floating-rate Tranches (FL) and Inverse Floaters (IFL)

- Floater and Inverse Floater must be created simultaneously

- Cap rate for IFL = IFL Interest when Reference Rate is Zero / Principal for IFL

- Total Principal for FL & IFL = Principal before “Sliced-up”; Total Coupon = Coupon before “Sliced-up

- Cap Rate for FL = Collateral Tranche Interest / Principal for Floater

- Appealing to investors who have floating-rate exposures

Structured Interest-only Tranches (IO)

- Other tranches’ coupon rate is set to be lower than coupon for collateral

- No par amount. Amount shown is the amount upon which interest will be determined. Notional Amount

- Notional Amount for x% IO = Original Tranche’s par value * Excess Interest / x%

Planned Amortization Class Tranches (PAC)

- If prepayment speed is within a specified band over the collateral ’s life, the cash flow pattern is known.

-

Within the specified band, the average life of tranche is stable. - PAC window: length of time over which expected repayment of principal are made. Narrower the window, more

the tranche resembles a corporate bond with bullet payments. PAC buyers appear to prefer tight widows.

- Effective Collar: Lower/Upper PSA that still allow maintenance of scheduled principal payments. Wider Effective

- Effective Collar: Lower/Upper PSA that still allow maintenance of scheduled principal payments. Wider Effective

Collar, more protection gained against prepayments.

- If PAC tranche is attractive, it must have lowest option costs: minimum Z-spread minus OAS.

Support Tranches (S) - Support tranches do not receive any principal until PAC tranches receive their scheduled principal payments.

- Support tranches are created to absorb prepayment risk, offering greater certainty for PACs

- Support tranches receive excess principal prepayments.

- S tranches have greatest level of prepayment risk.

- If S is paid off due to prepayment, the structure is broken and all PACs become sequential-pays.

3. Stripped MBS

Principal-Only Strips (PO)

- PO is purchased at substantial discount from par value.

- Faster prepayments, higher return for PO. Investor ’s return is solely determined by prepayment speed.

- Lower mortgage rate, faster prepayments, higher return and vice versa.

Interest-Only Strips (IO)

- No par value when purchased.

- IO investors want prepayments to be slow.

- Lower mortgage rate, faster prepayments, less interest generated, lower return.

- Higher mortgage rate, slower prepayments, but higher discount rate, lower return (too high rate, net effect)

4. Non-Agency Residential Mortgage Backed Securities

Underlying Mortgage Loans Underwriting Standards:

- Maximum Loan-to-Value, maximum Payment-to-Income, maximum Loan Amount Differences between Non-Agencies and Agencies: Guarantee.

5. Commercial Mortgage-Backed Securities

Credit risk: if defaults, lenders look into the proceeds of sale of property for repayment.

Analysis: lender must view each property on a stand-along basis.

Pay-down structure: highest-rating bond will get paid off first.

Call Protection: - Loan Level: Prepayment Lock-out, Defeasance, Prepayment Penalty Points, Yield Maintenance Charge

- Structural Level: Prepayments and defaults impact principal losses.

Balloon Maturity Provisions: principal payment at the end of maturity

Balloon risk: the risk that the loan will extend beyond the scheduled maturity date.

6. Asset-Backed Securities

1) General Concepts and Need-to-Knows - Parties Involved in Securitization

Party Description

Seller Originate loans and sell loans to SPV

Issuer/Trust SPV, buying loans and issuing securities against loans

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Issuer/Trust SPV, buying loans and issuing securities against loans

Servicer Service the loan

- Reason for creating structures: redistribute cash flows and risks among investors.

- Collateral Classification: Amortizing (Mortgages, Loans, etc), Non-Amortizing (Receivables)

- Securities backed by non-amortizing collateral have change in collateral.

- Projecting default is important to non-amortizing collaterals.

- Credit Enhancement:

External: Insurance Company (wrapped), letter of credit from a bank and guarantee by seller. Downgrade of the

third party can result in downgrade of securities in a structure.

Internal: Cash Reserve Funds, Excess Spread Accounts (points paid to reserve accounts to absorb possible future

loss, often Gross WAC – Service and other fees – Net WAC), Overcollateralization (absorbing losses to a certain

amount without affecting bond classes), senior-subordinate structure (prone to prepayments)

2) Home Equity Loan

Prepayments: PPC (Prospectus Prepayment Curve), issuer-specific Payment Structure:

- Non-Accelerating Senior Tranches: stable average life

3) Manufactured Housing-Backed Securities

Loan may be either mortgage or customer retail installment loan.

Prepayments are stable as the loans are not sensitive to refinancing.

Payment Structure: Same as MBS and Home Equity Loan