Mexican Bonds

Introduction

FINCAD provides coverage for numerous different types of Mexican bonds. The types for which there are jurisdictional bond functions are as follows:

Monetary Regulation Bonds (BREMs): issued by Banco de Mexico for the purpose of regulating liquidity in the money market and facilitating monetary policy. BREMs pay interest every 28 days. The coupon is revised daily, based on the rate at which financial intermediaries execute one-day repos with securities issued by banks. They are attractive for investors because they allow them to act defensively, given that they assimilate the changes in the economic surroundings, because of the daily changing rate.

Savings Protection Bonds (BPAs): issued by the Institute for the Protection of Bank Savings for the purpose of creating liquidity for its titles and improving the maturity profile of its debt. BPAs are long term credit titles that pay interest every 28, 91, or 182 days with a variable interest rate.

Federal Government Development Bonds with Floating Coupons (Bondes): issued by the Federal Government through Banco de Mexico. Bondes pay interest every 182 days, where the rate of interest is based on an adjusted Cetes rate.

Federal Government Development Bonds (Bonos): issued by the Federal Government through Banco de Mexico. Bonos pay a fixed rate of interest every 182 days.

Federal Government Development Bonds Denominated in Units of Investment (Udibonos): issued by the Federal Government through Banco de Mexico, designed to provide the investor with protection against inflation. Udibonos pay an UDI-denominated coupon every 182 days. UDI (Unidad De Inversion) represents accumulated inflation since April 1, 1995 denominated in Mexican Pesos. Udibonos offer the investor a real rate of return.

Analysis Supported

· Clean price, accrued interest, dirty price, duration, convexity, and other sensitivities

· Yield (or premium for BPA or Bondes) from price

· Cash flows

· Implied spread can be calculated given price

Technical Details

BREMs – Monetary Regulation Bonds

· Type: MXN denominated floating rate coupon bearing bond

· Issuer: Banco de Mexico

· Amortization: Bullet

· Maturity: 3 years

· Coupon Frequency: every 28 days

· Rate: Overnight interbank funding rate published daily by the Central Bank

· Day Count: Actual/360

Valuation

Market convention is to quote the spread over the average funding rate for the yield to maturity. For quotation purposes, the rate is assumed to be constant over the life of the bond, meaning all future cash flows are known.

The bond pricing formula is given as follows:

where

V = Face value

y = Implied yield

d = Number of days since last coupon payment of bond issue

n = Number of coupon payments remaining

C1 = Next coupon payment

C = Future coupon payments (excluding C1)

Rd = Interest rate for period between last coupon payment (or issuance) and trade date

ri = Historical interbank overnight interest rate reference published by Central Bank of Mexico

r = Central Bank of Mexico estimate of future interbank overnight interest rate

s = Market spread over r

The accrued interest can be calculated as follows:

BPA– Savings Protection Bonds

· Type: MXN-denominated floating rate coupon bearing bond

· Issuer: Institute for the Protection of Bank Savings via Banco de Mexico

· Amortization: Bullet

· Maturity: 3 years

· Coupon Frequency: every 28, 91, or 182 days

· Rate: The higher of the Cetes rate (28-day, 91 day, or 182 day) and the Central Bank’s gross annual rate for one month corporate notes. In practice, Cetes28, Cetes91, or Cetes182 rate is used.

· Day Count: Actual/360

Valuation

Market convention is to quote the spread over Cetes28, Cetes91, or Cetes182 rate for the yield to maturity. For quotation purposes, the rate to use for the current coupon is given, and the last know Cetes reference rate is used for all of the future cash flows such that the values of all but the first of the floating coupons are identical. This gives the following formula:

Where

V = Notional

Cetes = 28 day, 91 day, or 182 day Cetes reference rate

S = Spread over the Cetes rate

n = Number of coupon payments remaining

y = Bond yield

C = Coupon payment

d = Number of days since last coupon payment

T = Coupon tenor in days = 28 days, 91 days, or 182 days

Bondes – Federal Government Development Bonds with Floating Coupons

· Type: MXN-denominated floating rate coupon bearing bond

· Issuer: Secretaria de Hacienda y Credito Publico via Banco de Mexico

· Amortization: Bullet

· Maturity: 2, 3 and 5 years

· Coupon Frequency: 182 days

· Rate: greater of current Cetes rate or corresponding UDI inflation rate, determined at the end of the period

· Day Count: Actual/360

Valuation

Market convention is to quote the spread over the current Cetes rate for the specified maturity. A single, constant Cetes reference is used for all but the current coupon, such that the values of all future floating coupons are identical. The current coupon is calculated using a given coupon rate. This gives the following formula:

Where

V = Notional

CetesT = Current Cetes reference rate

S = Spread over the Cetes rate

n = Number of coupon payments remaining

y = Bond yield

C = Coupon payment

d = Number of days since last coupon payment

T = Coupon tenor in days = 182 days

Bonos – Federal Government Development Bonds

· Type: MXN-denominated fixed rate coupon bearing bond

· Issuer: Secretaria de Hacienda y Credito Publico via Banco de Mexico

· Amortization: Bullet

· Maturity: 3 and 5 years

· Coupon Frequency: every 182 days

· Day Count: Actual/360

Valuation

Market convention is to quote the annualized yield to maturity using the following bond pricing formula:

Where

V = Notional

n = Number of coupon payments remaining

y = Implied yield for period = annualized yield to maturity as quoted * 182 / 360

C = Coupon payment

RC = Annualized coupon rate

d = Number of days since last coupon payment

T = Coupon tenor in days = 182 days

Udibonos – Federal Government Development Bonds Denominated in Units of Investment

· Type: UDI-denominated fixed-rate coupon. UDI (Unidad De Inversion) represents accumulated inflation since 1-Apr-1995, denominated in Mexican pesos. UDIBONOS provide a real rate of return

· Issuer: Secretaria de Hacienda y Credito Publico via Banco de Mexico

· Amortization: Bullet

· Maturity: 5 and 10 years

· Coupon Frequency: every 182 days

· Rate: Fixed yield expressed in UDI. Corresponding MXN price is obtained using the current MXN/UDI exchange rate.

· Day Count: Actual/360

Valuation

Market convention is to quote the annualized yield to maturity using the following bond pricing formula:

Where

UDI = value per UDI (in Pesos)

V = Notional

y = Implied real yield for period = annualized real yield to maturity as quoted * 182 / 360

C = Coupon payment in UDI = annualized coupon rate * 182 / 360

d = Number of days since last coupon payment

T = Coupon tenor in days = 182 days

n = Number of coupon payments remaining

Functions

Instrument Type	Valuation Functions	Cash Flow Functions
BREM	aaBond_MX_BREM_p aaBond_MX_BREM_accrued aaBond_MX_BREM_sprd	aaBond_MX_BREM_cf
BPA	aaBond_MX_BPA_p aaBond_MX_BPA_accrued aaBond_MX_BPA_y	aaBond_MX_BPA_cf
Bondes	aaBond_MX_Bondes_p aaBond_MX_Bondes_accrued aaBond_MX_Bondes_y	aaBond_MX_Bondes_cf
Bonos	aaBond_MX_Bonos_p aaBond_MX_Bonos_accrued aaBond_MX_Bonos_y	aaBond_MX_Bonos_cf
Udibonos	aaBond_MX_UDI_p aaBond_MX_UDI_accrued aaBond_MX_UDI_y	aaBond_MX_UDI_cf

Naming Conventions

Suffix	Description
cf	output cash flow tables
p	output prices and risk statistics
y	output yield and risk statistics
accrued	output accrued interest
sprd	output implied spread

Market Data Requirements

The market data required for BREMs is the historical interest rates and the estimated future overnight interest rate. These rates are calculated and published by Banco de Mexico.

Examples

Example 1: BREM Value, Risk Statistics, and Cash Flows

In this example, we will use the function aaBond_MX_BREM_p to calculate the bond value and risk statistics for a Mexican BREM. The details of the bond and how FINCAD functions can be used to price the bond are given in the following workbook:.

Mexican BREM Bond Value and Cash Flow Example

Example 2: BPA Value, Risk Statistics, and Cash Flows

In this example, we will use the function aaBond_MX_BPA_p to calculate the bond value and risk statistics for a Mexican BPA. The details of the bond and how FINCAD functions can be used to price the bond are given in the following workbook:.

Mexican BPA Bond Value and Cash Flow Example

Example 3: Udibonos Value, Risk Statistics, and Cash Flows

In this example, we will use the function aaBond_MX_UDI_p to calculate the bond value and risk statistics for a Mexican Udibonos. The details of the bond and how FINCAD functions can be used to price the bond are given in the following workbook:.

Mexican Udibonos Bond Value and Cash Flow Example

References

[1] Fabozzi, Frank J., and Pilarinu, Efstathia (editors, 2002), Investing in Emerging Fixed Income Markets, John Wiley & Sons, Inc.

Disclaimer

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