Valuation of Bonds Key Concerns and Solutions Content page 1 Nitin Jaiswal Bloomberg L.P

Agenda for the Presentation Importance of Valuation for a Bond Market Key Issues relating to Bond Valuations in Asia Government Bonds Corporate Bonds Making a robust Valuation model for Asian Bond Markets – ideas and suggestions. Content page 1

Importance of Valuation for a Bond Market Transparency IAS 39 Guideline Basil II Guideline Stringent disclosure requirement post Enron and WorldComm Scandal Risk Management Key concern for any bank Avoiding financial scandals Brings Liquidity in the Market Transparent market will attract investment Example: Bond Funds, investment in Financial Industry A good valuation model is the necessity of every financial markets. Content page 1

Valuation of Government Bonds Key Requirements: To have a well accepted model to calculate fair values for the illiquid bonds. To have a well accepted par coupon and zero coupon curve. To have a well accepted underlying risk free government curve. Easy availability of the information. Content page 1

Valuation of Corporate Bonds Key Issues: Nature of Corporate Bonds Large number of issues Complicated structures Illiquidity premium No clear cut guideline on corp. bond valuations Information Disclosure Bond Structure Ratings information Yield calculators Price availability for all the bonds Issues related to private placement Content page 1

Nature of Corporate Bonds Large number of corp. bonds : (ex Japan and Australia) Complicated Structures: Normal Fixed Normal Floating Normal Zero Coupon Callable Fixed Callable Floating Callable Zero Coupon Callable Step-up Callable Defaulted Sinkable Fixed Sinkable Floating Extendable Fixed Call Extendable Fixed Convertible fixed Convertible call Fixed / Floating Content page 1

Liquidity in Corp. Bonds Average number of corporate bonds traded in last 7 days: Malaysia 21 India 12 Thailand 8 Korea 24 No clear cut guideline for corp. bond valuations Content page 1

Information Disclosure Most of the corporate bonds are private placement: Lack of easy availability of information and this leads to illiquidity in the long run. Availability of bond structure Ratings information Treatment of unrated papers Lack of clarity on issuer v/s program rating. Availability of rating information Methodology of Yield calculators Each lead manager structure the issues in his / her own way. No public available of Calculation information and convention. Price availability for all the bonds Growth of structured bonds Content page 1

Your Thoughts and Ideas Better Bond Valuation Models. Content page 1