Fixed Rate Treasury Notes Finance Essay

Published: 2021-06-27 06:45:05
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The Philippine domestic bond market consists of 2 types of bonds – short- and long-term bonds; mainly issued by the national government. The majority of bonds in the Philippine bond market are the Treasury notes and bonds. Though the corporate bonds make up a small percentage of the overall bond market, they have been steadily growing their share in the last few years.
Over the last 5 years, the Philippine fixed income market has put in efforts to bring structure and order into the bond market environment. However, more work is needed in the organization of the spot market as the market drivers and stakeholders consider it an important and necessary step in creating market structures that will bring robustness into the system.
As the credit rating of Philippines was upgraded recently by both S&P and Moody’s, it has lent a favorable investment environment.

Moody’s
S&P
Fitch
Sovereign FCY LT Rating
Ba2
BB+
BB+
Outlook
Positive
Stable
Stable
In the secondary market, liquidity for both government and corporate bonds increased as the volume of trade at the fixed income exchange (FIE) climbed to P1,199.5 billion in the first three months of 2012, up by 84 percent y-o-y and by 13.9 percent q-o-q.
Source: Bureau of Treasury
Recent Highlights
The interest rate is on a downward trend and the inflation is almost stable now. However as the country’s economy grows, it’s important to have the right monetary policies to be able to keep inflation in control. Hence the BSP recently cut the interest by 25 basis points to 3.75 percent in a bid to bring about a strong financial system combined with a balanced and sustainable growth in economy.
F:AIMMRRFinanceLabFixed IncomeADBPolicy rates and Inflation trends.png
Source: asianbondsonline.adb.org
The first quarter of 2012 has shown a surprisingly high growth of 6.4% after a low performance the entire last year. The high growth is primarily driven by increased consumer spending that is underpinned by a healthy remittance inflow and strong credit growth.
Size of LCY Bond Market in % of GDP: F:AIMMRRFinanceLabFixed IncomeADBSize of LCY Bond market in % of GDP.png
Source: asianbondsonline.adb.org
Over the years, there is an increasing number of corporate bonds that are being issued. The public sector continues to dominate the market of total bond issuances with 92% share while the private sector made up for the rest 8%.
According to the Bureau of Treasury, the total bond issuance (public and private combined) amounted to 350Bn Pesos in the first quarter of 2012. This marked an increase of 30% as compared to the same quarter last year; while the increase was 57.2% as compared to the previous quarter (Q4 2011). The public sector issuance was up by 31% while the private was up by 17%. This was mainly due to the very liquid domestic financial markets which helped in sourcing funds.
Bond Turnover Ratio
F:AIMMRRFinanceLabFixed IncomeADBBonds Turnover Ratio.png
Source: asianbondsonline.adb.org
Bonds Portfolio
Corporate Bonds:
Bond Name
Coupon
Maturity
YTM
LTP
Duration
RLC 07-14-NWT
8.50%
7/14/2014
8.50%
99.9783024
1.88
RCB 18 R13
7.00%
2/22/2013
7.00%
99.9965188
0.56
MBT 18 R13-NWT
7.75%
10/3/2013
6.875%
101.0914197
1.11
Government Bonds:
Ticker
Series
Coupon
Maturity
YTM
LTP
Duration
RPGB
7-50
5.375
10/28/2017
4.801125
102.625
4.48
RPGB
R510
6
3/3/2016
4.70722
104.375
3.2
RPGB
7-49
7
3/31/2017
4.608435
110.356
3.92
RPGB
5-70
4.625
7/5/2017
4.595661
100.375
4.35
RPGB
R7-1
7
9/24/2016
4.541237
109.125
3.6
RPGB
R7-2
6.625
8/19/2017
4.564386
108.716
4.27
RPGB
1042
9.125
9/4/2016
4.49242
117.33
3.38
Methodology
Listed below are the considerations as well as the methodology that went behind selection of the bonds for investment purpose.
The most important criterion for selection was YTM.
Secondly, we looked at the maturity date of bonds to be before 2017, in line with the investment philosophy.
Thirdly, we calculated the Duration of bonds. Duration refers to the percentage change in the price of a bond caused by one percent change in yield. Hence it’s a measure of resilience of the price of the bond to interest rate fluctuations. We wanted to calculate DV01 (percentage change in the price of a bond caused by one basis point change in yield) which is a better indicator as the market has become much more volatile in the last few years.
Weightages were assigned to these 3 criteria to arrive at a weighted average score for each bond that would help in selecting the top bonds for our portfolio.
Bonds with highest yields and the lowest duration made the cut for the portfolio.
For corporate bonds, we took into account the credit rating as well.
As seen earlier, the Government to Corporate bond ratio is 92:8. At the same time, the corporate bonds are also steadily increasing in volume. After studying the bonds, we decided to split our investment as 60% in Government bonds and 40% in corporate bond.
Recommendation
Based on the above criteria, we decided to split our investment as 60% in Government Bonds and 40% in corporate bonds. Below, is the portfolio of bonds we selected. Since the interest rates are expected to be low, the bonds with low duration should be traded on the secondary market and the bonds with high duration should be ‘Held to Maturity’. Also, the liquidity will be more in case of low duration bonds.
Government Securities
Government securities are direct and unconditional obligations of the national government. They are issued by the Bureau of Treasury (BTr).
Treasury Bills [1] :
Treasury Bills (Tbills) carry a maturity of one year or less and can be traded in the secondary market before maturity. Treasury Bills do not bear interest. They are issued and sold at a discount from face value and are redeemed at maturity for the full face value of the instrument.A 
Issuer
National government
Term
91, 182, 364 days
Tax feature
Interest income subject to 20% final withholding tax
Type of income
Tax paid income
Interest computation
True discount formula
Manner of purchase
Auction or through secondary market
Fixed-Rate Treasury Notes [2] :
Fixed Rate Treasury Notes (FXTNs) are interest bearing and carry a term of more than one year and can be traded in the secondary market before maturity.A Fixed Rate Treasury Notes are considered one of the primest investment instruments in the market. They are safe, liquid and offer attractive returns to investors.A Fixed Rate Treasury notes are issued and sold at a price equal to be face value and are redeemed at maturity for the full face value of the instrument plus interest/coupon of the last period.
Issuer
National government
Term
2, 5, 7, 10, 15, 25 years
Tax feature
Interest income subject to 20% final withholding tax
Type of income
Tax paid income
Rate
Fixed for the life of the FXTN; based on lowest accepted yield to maturity on auction date
Coupon payment period
Payable semi-annually in arrears
Interest computation
Simple interest/add-on
Manner of purchase
Auction or through secondary market
Retail Treasury Bonds / Multi-Currency Retail Treasury Bonds [3] :
Retail treasury bonds are government securities that are issued to small individual investors in smaller denominations with frequent, fixed-rate coupon payments.A These instruments carry a term of more than one year and can be traded in the secondary market.A Retail treasury bonds are issued to underwriters instead of primary dealers.A In April 2010, the government began selling multicurrency retail treasury bonds to enable Filipinos to invest in foreign-currency denominated government securities at an affordable minimum denomination of USD100 or EUR100.
Issuer
National government
Term
3 and 5 years
Tax feature
Interest income subject to 20% final withholding tax
Type of income
Tax paid income
Rate
Fixed for the life of the RTBs
Coupon payment period
Payable quarterly in arrears
Interest computation
Simple interest/add-on
Manner of purchase
Auction or through secondary market
Recommendation:
Government bonds make up majority portion of the total bond issuances; at the same time the corporate bond issuances are on a steady increasing trend. We will be investing 60% of our fixed income portfolio in government securities. We will be investing in RTB as the minimum amount to invest is 5000 pesos whereas in Treasury bills and Fixed-rate Treasury Notes it is 10 million.
Corporate Bonds
Robinsons Land Corporation
Robinsons Land Corporation, together with its subsidiaries, engages in the acquisition, development, leasing, and sale of real estate properties in the Philippines. It develops, leases, and manages shopping malls, mixed use properties, offices and residential buildings, as well as engages in the land and residential housing development activities comprising socialized housing projects. As of September 30, 2011, it operated 29 shopping malls, including 6 malls in Metro Manila and 23 malls in other urban areas in the Philippines.
ROBINSONS LAND CORPORATION (RLC)
Year ended on
Revenues
Net Income
Interest Coverage Ratio
ROE
Sep-10
11,297.00
3,592.80
15.23
13.10%
Sep-11
13,344.50
3,974.10
20.39
10.20%
Bond Name
Coupon
Maturity
YTM
RLC 07-14-NWT
8.50%
7/14/2014
8.50%
Rizal Commercial Banking Corporation
Rizal Commercial Banking Corporation (RCBC) is a universal bank in the Philippines that provides a wide range of banking and financial products and services. In terms of capital the bank rank 4th among the private banks in Philippines. The Bank and its subsidiaries are engaged in all aspects of traditional banking, investment banking, retail financing (credit cards, auto loans and mortgage/housing loans), leasing, foreign exchange and stock brokering.
RIZAL COMMERCIAL BANKING CORPORATION (RCB)
Year ended on
Revenues
Net Income
ROE
NPA
CAR
Dec-10
16,424.00
4,248.00
14.08%
4.37%
17.77%
Dec-11
18,678.00
5,007.00
13.96%
3.57%
18.52%
Half year ended on June 2012
9,807.00
3,008.00
15.43%
3.57%
17.11%
Bond Name
Coupon
Maturity
YTM
RCB 18 R13
7.00%
2/22/2013
7.00%
Metropolitan Bank & Trust Company
Metropolitan Bank & Trust Company, together with its subsidiaries, provides a range of banking and financial products and services. Its Consumer Banking segment offers individual customers’ deposits, including savings, checking, and time deposits; and provides consumer type loans and credit cards. The Corporate Banking segment engages in handling loans and other credit facilities; and offers deposit and current accounts to corporate and institutional customers. Company’s Investment Banking segment arranges structured finance, as well as provides services relating to privatizations, initial public offerings, and mergers and acquisitions. The Treasury segment offers money market, trading, and treasury services.
METROPOLITAN BANK & TRUST COMPANY (MBT)
Year ended on
Revenues
Net Income
ROE
NPL
CAR
ROA
Dec-10
39,339.00
8,366.00
10.27%
2.88%
16.40%
0.96%
Dec-11
44,945.00
11,031.00
11.17%
2.22%
17.40%
1.20%
Half year ended on June 2012
26,644.00
7,417.00
13.43%
2.63%
18.53%
1.56%
Praveen Sharma
[email protected]/* */
Bond Name
Coupon
Maturity
YTM
MBT 18 R13-NWT
7.75%
10/3/2013
6.875%

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