YIELD SPREAD PADA SURAT BERHARGA YANG BERSIFAT UTANG Pertemuan 4 -mupo- YIELD SPREAD PADA SURAT BERHARGA YANG BERSIFAT UTANG Pertemuan 4 -mupo- Mata kuliah: F Pengantar Analisis Pendapatan Tetap Dan Ekuitas Tahun: 2010

Bina Nusantara University 3 YIELD SPREAD PADA SURAT BERHARGA YANG BERSIFAT UTANG Materi: 1. Interest rate determination 2. Yield on non Treasury rate 3. Swap spread

1. Interest rate determination Focus in: Focus in: 1.1 the relationship between interest rates offerd on different bond issues at a point in time 1.1 the relationship between interest rates offerd on different bond issues at a point in time 1.2 the relationships among interest rates offered in different sectors of the economy at given point in time. 1.2 the relationships among interest rates offered in different sectors of the economy at given point in time. Example: the FED uses the following interest rate policy tools: Example: the FED uses the following interest rate policy tools:  Open market policy  The discounted rate  Bank reserve requirements  Verbal persuasion to influence how bankers supply credit to businesses and consumers Open market policy dan merubah discounted rate sering digunakan oleh the Fed. Secara bersamaan keduanya dapat menaikkan atau menurunkan cost of funds dalam perekonomian.

2. Yields on non Treasury securities Measuring Yield spreads Measuring Yield spreads Yield spread between any two bond issues, bond X and Yield spread between any two bond issues, bond X and bond Y, computed as follows: bond Y, computed as follows: Yield spread= yield on bond X - yield on bond Y Yield spread= yield on bond X - yield on bond Y Example: on Feb, 2002, the yield on the 10 year on the run Treasury issue was 4,88% and the yield on a single A rated 10 year industrial bond was 6,24%. If bond X is the 10 year industrial bond and bond Y is the 10 year on the run Treasury issue, the absulute yield spread was: Example: on Feb, 2002, the yield on the 10 year on the run Treasury issue was 4,88% and the yield on a single A rated 10 year industrial bond was 6,24%. If bond X is the 10 year industrial bond and bond Y is the 10 year on the run Treasury issue, the absulute yield spread was: Yield spread= 6,24 – 4,88% = 1.36% or 136 basis point Yield spread= 6,24 – 4,88% = 1.36% or 136 basis point Sometimes bonds are compared in terms of a yield ratio: Sometimes bonds are compared in terms of a yield ratio: Yield ratio = Yield on bond X Yield ratio = Yield on bond X Yield on bond Y Yield on bond Y

Yields on non Treasury securities (cont’) In US, bond market when these measures are computed, bond Y (the reference bond) is a Treasury issue. The equations for the yield spread measures as follow: Absolute yield spread: Absolute yield spread: yield on bond X – yield of on the run Treasury yield on bond X – yield of on the run Treasury Relative yield spread: Relative yield spread: yield on bond X – yield of on the run Treasury yield on bond X – yield of on the run Treasury yield of on the run Treasury yield of on the run Treasury Yield Ratio: Yield Ratio: yield on bond X yield on bond X yield of on the run Treasury yield of on the run Treasury

Yields on non Treasury securities (cont’) For the above example comparing the yields on the 10 year single A rated industrial bond and the 10 year on the run Treasury, the relative yield spread and yield ratio are computed : Absolute yield spread = 6.24%-4.88% = 1.36% = 136 basis points Relative yield spread = 6.24%-4.88% = = 27.9% 4.88% 4.88% Yield spread = 6.24% = % 4.88%

3.Swap spread Another important spread measure is the Swap spread. Another important spread measure is the Swap spread. 3.1 Interest rate Swap and the Swap spread 3.1 Interest rate Swap and the Swap spread In an interest rate Swap, two parties (called counterparties) In an interest rate Swap, two parties (called counterparties) agree to exchange periodic interest payment. agree to exchange periodic interest payment. In the most common type of Swap, one party agrees to pay the In the most common type of Swap, one party agrees to pay the other party fixed interest payments at designated date for the other party fixed interest payments at designated date for the life of the Swap. This party is referred to as the fixed rate life of the Swap. This party is referred to as the fixed rate payer. The fixed rate that the fixed rate payer pays is called payer. The fixed rate that the fixed rate payer pays is called the Swap rate. The other party, who agree to make the Swap rate. The other party, who agree to make interest rate payments that flot with some reference rate, is interest rate payments that flot with some reference rate, is reffered to as the fixed rate receiver. reffered to as the fixed rate receiver. The fixed rate has a specified “spread” above the yield for a The fixed rate has a specified “spread” above the yield for a Treasury with the same term to maturity as the Swap. This Treasury with the same term to maturity as the Swap. This specified spread is called the Swap spread. The Swap rate is specified spread is called the Swap spread. The Swap rate is the sum of the yield for a Treasury with the same maturity as the sum of the yield for a Treasury with the same maturity as the Swap plus the Swap spread the Swap plus the Swap spread

3.2 Role of Interest Rate Swap 3.2 Role of Interest Rate Swap Interest rate Swap has many important application in fixed Interest rate Swap has many important application in fixed income portofolio management and risk management. They tie income portofolio management and risk management. They tie together the fixed rate and floating rate sector of the bond together the fixed rate and floating rate sector of the bond market. market. As a result, investor can convert a fixed rate asset into a As a result, investor can convert a fixed rate asset into a floating rate asset with an interest rate Swap floating rate asset with an interest rate Swap 3.3 Determinant of the Swap spread 3.3 Determinant of the Swap spread Market participants throughout the world view the Swap Market participants throughout the world view the Swap spread as the appropriate spread measure for valuation and spread as the appropriate spread measure for valuation and relative analysis. relative analysis. Swap rate = Treasury rate + Swap sread Swap rate = Treasury rate + Swap sread where Treasury rate is equal to the yield on a Treasury with where Treasury rate is equal to the yield on a Treasury with the same maturity at the Swap. the same maturity at the Swap.

Determinant of the Swap spread (cont’) Since the parties are swapping the future reference rate for Since the parties are swapping the future reference rate for the Swap rate: the Swap rate: reference rate = Treasury rate + Swap spread reference rate = Treasury rate + Swap spread Solving for the Swap spread we have : Solving for the Swap spread we have : Swap Spread = reference rate – Treasury rate Swap Spread = reference rate – Treasury rate Since the most common reference rate is LIBOR, we Since the most common reference rate is LIBOR, we can substitute this into the above formula getting: can substitute this into the above formula getting: SWAP SPREAD = LIBOR – Treasury rate SWAP SPREAD = LIBOR – Treasury rate Thus, the Swap spread is a spread of the global cost of short term borrowing over the Treasury rate Thus, the Swap spread is a spread of the global cost of short term borrowing over the Treasury rate