FM03 Debt MKT 0208

FIN3103B/3703B
Financial Markets
03: Interest Rates and Debt Market
Dr. YUE Ling
1 Sem2 AY2020/21
Interest Rates and the Debt Market
I. Interest Rates
1. Real vs Nominal
2. Effective vs Quoted
II. Debt Market

1. Bond recap
2. Types of bond
3. Yield curves
4. US Treasuries
5. Singapore Government Securities
6. Singapore Corporate Debt Market
2 Sem2 AY2020/21
1. Real vs Nominal
• Inflation:
• The increase in general price level
• Usually measured by the increase in price of a representative
basket of goods and services as an index: consumer price
index (CPI) or producer price index (PPI)
𝐶𝑃𝐼 𝐶𝑃𝐼
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑝 100
𝐶𝑃𝐼
or
𝐸 𝐶𝑃𝐼 𝐶𝑃𝐼
E 𝑝 100
𝐶𝑃𝐼
3 Real vs Nominal
1. Real vs Nominal
• Nominal interest rate:
• The reported interest rate that one would observe in the
market
• Increases with inflation
• As lenders demand higher returns to cover for the loss of
purchasing power due to inflation
• Real interest rate:

• The interest rate after netting off the effect of inflation
• Different economies (or same economy at different point of
time) has different rate of inflation
• Real interest rate serves as a means of comparing the cost of
borrowing between economies (or in the same economy but
between different periods in time).
4 Real vs Nominal
Fisher Equation (without tax)
(1 + nominal rate) = (1 + real rate) (1 + inflation rate)
1 𝑖 1 𝑟 1 𝑝
𝑖 𝑟 𝑝 𝑟𝑝
• Since rp is small
𝑖 𝑟 𝑝
or Nominal rate ≈ Real rate + Inflation rate
5 Real vs Nominal
Fisher Equation (with tax)
1 𝑖 1 𝑡 1 𝑟 1 𝑡 1 𝑝
• where t is the tax rate (because interest earnings are taxable)
• Example: Nominal rate = 10%, inflation rate = 5%, tax rate = 5%
• Real rate (no tax) ≈ ______________

• Real rate (no tax) =______________
• Real rate (with tax) =______________
6 Real vs Nominal
Types of Inflation
• Headline inflation
• Core inflation
• Expected inflation
• Deflation
10 Real vs Nominal
Types of Inflation
Headline inflation:
• Total inflation of an economy
• Inclusive of food and energy (volatile)
• May not necessarily reflect the current state of the economy
Core inflation:
• Normally: exclude items such as food and energy
• Singapore: exclude accommodation and private road transport.
This is known as the MAS core inflation
• Department of Statistics Singapore
11 Real vs Nominal
Source: https://www.singstat.gov.sg/modules/infographics/consumer-price-index
12
Types of Inflation
Expected inflation:
• Need to be carefully managed. Why?
• Bringing forward ______
• Bringing forward ______
• Demand higher/lower wages
• Results: Fuel actual inflation
Deflation:
• Examples: Japan for the last 20+ years, Eurozone 2014, 2015
• Problems?
• Delay _______
• Past debts become more/less difficult to service
• Real interest rate can be relatively too high/low
14 Real vs Nominal
Types of Inflation
What is the most dire situation?
• Stagflation
• persistent high inflation combined with high unemployment
and stagnant demand in a country’s economy
• Both fiscal and monetary policies will hurt the economy
18 Real vs Nominal
I. Interest Rates
1. Real vs Nominal
II. Debt Market

1. Bond recap
2. Types of bond
3. Yield curves
4. US Treasuries
20 Sem2 AY2020/21
2. Effective and quoted interest ratess
• Different loans have different repayment schemes it can be
difficult to compare loans
• Effective rate is an IRR method that can be use to compare
different loans
𝐴𝑃𝑅
1 𝐸𝐴𝑅 1
𝑚
• APR: Annual percentage rate

• EAR: Effective annual rate
• m: Number of times interest is compounded in a year
21 Effective vs Quoted
Amortized loan and interest rates
• An amortized loan (e.g. mortgage) has periodic loan instalments
consisting of interest due and reduction of principal.
• The periodic payment and proportion of interest and principal in
each period depend on how interest rates are quoted.
• How are the rates quoted? There are many ways, e.g.:
1. Flat basis
2. Discounted flat basis
3. Annual rest
4. Declining balance
• Often, quoted rate APR EAR. So we need to calculate EAR,

based on the given basis, in order to compare loans of different
conditions.
Different basis of interest calculation (1)
Example: Principal = $100,000, to be repaid monthly over 3 years,
quoted rate = 10%
Basis (1): Flat basis

Interest payments are calculated based on the original loan amount
and the monthly interest stays the same throughout.
Total interest = $100,000 x 0.1 x 3 = $30,000

Principal + interest = $130,000
Monthly payment = $130,000/(3 x 12) = $3,611.11
Input: PV = _______, PMT = ______, n = _____(number of

payments)
i = ______
APR = __________________
EAR = __________________
quoted rate = 10%
Basis (1): Flat basis

Interest payments are calculated based on the original loan amount
and the monthly interest stays the same throughout.
Total interest = $100,000 x 0.1 x 3 = $30,000

Principal + interest = $130,000
Monthly payment = $130,000/(3 x 12) = $3,611.11
Input: PV = 100,000, PMT = - 3,611.11, n = 36 (number of

payments)
i = 1.49%
APR = __________________
EAR = __________________
quoted rate = 10%
Basis (2): Discounted flat basis

Similar to flat basis, but the quoted rate is discount rate.
Principal + interest = $100,000/(1-(0.1 x 3))

= $142,857.14
Monthly payment = $142,857.14/(3 x 12) = $3,968.25
Input: PV = _______, PMT = _________, n = _________

i = ______
APR = _____
EAR = _____
quoted rate = 10%
Basis (3): Annual rest

The calculation of annual payment is similar to annuity but the actual
payment is made monthly.
PV = 100,000, i = 10%, n = 3
Annual payment = PMT = 40,211.48
Monthly payment = $40,211.48/12 = $3,350.96
Input: PV = __________, PMT =__________, n = ________

i = ______
APR = _____
EAR = _____
quoted rate = 10%
Basis (4): Declining balance

In this case, same as monthly rest.
i = 10/12% = 0.83%
APR = 10%
EAR = 10.47%
Input: PV = 100,000, i = 0.83%, n = 36

Monthly payment = PMT = ____________
Compare loans
• Example: principal = $100,000, to be repaid monthly over 3 years,
quoted rate = 10%.
• Question: Which quoted rate do you prefer if you need to borrow?
Compare the monthly payment:

• Flat basis: $3,611.11
• Discounted flat basis: $3,968.25
• Annual rest: $3,350.96
• Declining balance (monthly rest): $3,226.72
Compare loans
• Example: principal = $100,000, to be repaid monthly over 3 years,
quoted rate = 10%.
• Question: Which quoted rate do you prefer if you need to borrow?
Or, compare the EAR:

• Flat basis: 19.46%
• Discounted flat basis: 27.89%
• Annual rest: 13.37%
• Declining balance (monthly rest): 10.47%
Amortization table: monthly rest
• Interest is calculated based on the outstanding balance of the loan in the
beginning of each month. As the outstanding loan amount is paid down
every month, the interest also reduces over time.
Period Principal Interest Payment Principal Repayment Total Monthly Payment
1 100,000.00 833.33 2,393.39 3,226.72
2 97,606.61 813.39 2,413.33 3,226.72
3 95,193.28 793.28 2,433.44 3,226.72
4 92,759.84 773.00 2,453.72 3,226.72
5 90,306.12 752.55 2,474.17 3,226.72
. . . . .
. . . . .
. . . . .
30 21,852.57 182.10 3,044.61 3,226.72
31 18,807.95 156.73 3,069.99 3,226.72
32 15,737.97 131.15 3,095.57 3,226.72
33 12,642.40 105.35 3,121.37 3,226.72
34 9,521.03 79.34 3,147.38 3,226.72
35 6,373.66 53.11 3,173.60 3,226.72
36 3,200.05 26.67 3,200.05 3,226.72
Amortization table: annual rest
• The calculation of annual payment is similar to annuity but the actual
payment is made monthly. The result is that the principal is reduced once
a year and thus the interest which is calculated based on the outstanding
balance in the beginning of each year.
.
.
.
.
Amortization table: flat basis
• Interest payments are calculated based on the original loan amount and
the monthly interest stays the same throughout.
Different basis of interest calculation - Summary
Eg: Principal = $100,000, to be repaid monthly over 3 years (N years),
quoted rate (Rq) = 10%.
Flat Discounted flat Annual rest Declining balance
(monthly rest)
Interest $ Principle *
Rq*N
Total payment Interest+ Principle/
Principle (1‐ Rq*N)
Annual payment Annuity
(calculator)
Monthly payment Total Total payment/ Annuity/ 12 “Month‐ity”
(PMT) payment/ (12*N) (calculator)
(12*N)
EAR 19.46% 27.89% 13.37% 10.47%
Fin Calculator:
Input: PV = principle, PMT = — monthly payment, n = number of months (12*N);
Output: i = monthly interest rate
Calculate: APR, EAR
Financial calculators
• If you can perform the above computations effectively without the
help of a financial calculator, then you probably do not need one
• Still might be a good idea to have one
• If you need one, buy as soon as possible and get familiar with the
it as different calculators work differently
• My complementary financial calculator tutorial slides walk through
the steps for 3 models: HP 12C, TI BAII Plus, and HP-10B II.
• It would be a good idea to buy a model that your classmates are
using
42
I. Interest Rates
1. Real vs Nominal
II. Debt Market

1. Bond recap
2. Types of bond
3. Yield curves
4. US Treasuries
43 Sem2 AY2020/21
1. Bond Recap
Definition:
• A promissory note or security issued by a borrower (business or
government unit) that obligates the issuer to make specified fixed
payments to the holder over a specific period (usually long term)
Features:
• Par value (F): Stated face value of the bond (e.g. $1,000);
• Coupon rate (c): A percentage of the face value;
• Coupon payment (C): Interest ($) paid to the lender each period
(annually, semi-annually, or quarterly)
• Maturity date: the date whereby the par will be repaid;
• Maturity: Life of the bond
• Time to maturity (n): Time remaining before the maturity date
• Call provision: A provision whereby the issuer may pay off the bond
prior to maturity
• Price (P): price at which the bond can be bought or sold.
44 Bond Recap
Bond price
• Coupon rate = 10%, market rate = 10%, maturity = 5 years
0 1 2 3 4 5
10%
price = ? $100 $100 $100 $100 $1,100
𝐶 𝐶 𝐶 𝐶 𝐹
𝑃𝑟𝑖𝑐𝑒 ⋯
1 𝑖 1 𝑖 1 𝑖 1 𝑖 1 𝑖
𝐶 𝐹
1 𝑖 1 𝑖
100 1000
1 .1 1 .1
= ——————
45 Bond Recap
Yield to maturity
• Yield of the bond if one holds till maturity, assuming that each
coupon is reinvested at the same rate
• Example
• Par value = $1,000, current price = $950, coupon rate = 10%,
annual payment, maturity = 5 years
100 100 100 100 1100

950
1 𝑌𝑇𝑀 1 𝑌𝑇𝑀 1 𝑌𝑇𝑀 1 𝑌𝑇𝑀 1 𝑌𝑇𝑀
YTM = ——————
47 Bond Recap
Yield to maturity
$1400
When the YTM < coupon, the bond trades at a premium.
1300
Bond Value
1200
1100
When the YTM = coupon, the bond trades at par.
1000
800
0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
Discount Rate
coupon = 6 3/8
When the YTM > coupon, the bond trades at a discount.
49 Bond Recap
Yield to maturity
• Yield of the bond if one holds till maturity, assuming that each
coupon is reinvested at the same rate
• Example
• Par value = $1,000, current price = $950, coupon rate = 10%,
semi-annual payment, maturity = 5 years
50 50 50 1050
950 ⋯
1 𝑦 1 𝑦 1 𝑦 1 𝑦
y = ——————
YTM (p.a.) = ____________
Effective Annual Yield (EAY) = ____________
50 Bond Recap
Zero-coupon yield
• Yield on a zero-coupon bond
• Example: Par value = $1,000, current price = $750, maturity = 5

years
1000
750
1 𝑖
𝑖 = ______
• YTM of a zero-coupon bond = 𝑖
53 Bond Recap
1. Bond recap - Stylized facts
• Bond price and market interest rates are negatively related
• Change of interest rate affects debt instruments in two ways

• All else constant, a bond with longer maturity is more price
sensitive than a bond with shorter maturity when interest rate
changes.
• All else constant, a bond with lower coupon rate is more price
sensitive than a bond with higher coupon rate.
• For any bond, a given increase in interest rate will cause a smaller
price change than a decrease in interest rate of the same
magnitude.
55 Bond Recap
Determination of Interest Rate on a specific bond
• The default free, short-term, real interest rate is adjusted for:

• Anticipated inflation: Price of bond lower if anticipated inflation
is high
• Term to maturity: Longer term, more risky
• Default / credit risk: Price of bond will drop if issuer’s
perceived credit quality deteriorates
• Optional features: Callable, puttable, convertible
• Event risk, liquidity, tax status, exchange risk, etc: e.g. If
interest rates in the economy increase, prices of bonds will
decrease
56 Bond Recap
I. Interest Rates
1. Real vs Nominal
II. Debt Market

1. Bond recap
2. Types of bond
3. Yield curves
4. US Treasuries
57 Sem2 AY2020/21
2. Types of Bonds
Level coupon bonds: periodic fixed (level) coupon payments
• most common
𝐶 𝐹
𝑝𝑟𝑖𝑐𝑒
1 𝑖 1 𝑖
Perpetual bonds: Pays a constant stream of coupon forever, i.e.

never mature. E.g., consol.
𝐶
𝑝𝑟𝑖𝑐𝑒
𝑖
Pure discount bonds (zero-coupon bond or zeros): Bonds that

make no coupon payments and thus priced at a deep discount
𝐹
𝑃𝑟𝑖𝑐𝑒
1 𝑖
58 Bond Types
Types of Bonds
Callable bonds: Bonds that contains a call provision that gives the
issuer the right to call the bonds for redemption before maturity
Convertible bonds: Bonds that allow holders to convert bonds to

stocks at pre-specified ratio
Floating rate bonds: Bonds with coupon payments that are

adjustable, normally tie to an interest rate index (eg. LIBOR, SIBOR)
• Usually trade close to par
59 Bond Types
Types of Bonds
Domestic bonds:
• Market of issue = currency = nationality of issuer
• E.g. US$ bond placed in US by US firms
Eurobonds:
• Market of issue ≠ currency
• Bonds issued and sold outside the country of the currency in which
they are denominated (e.g. US$-denominated bonds issued in
Europe)
Asian Dollar Bonds:

• A type of Eurobond that is issued in Asia (e.g. US$-denominated
bonds issued in Singapore)
Dim Sum Bonds:

• CNY denominated bond issued outside of China by a Chinese firm
• Mostly in Hong Kong
60 Bond Types
Types of Bonds
Foreign Bonds:
• Market of issue = currency ≠ nationality of issuer
• Bonds issued outside of the issuer’s country, usually denominated
in the currency of the country in which they are issued (e.g. US$
bond placed in US by non-US firms)
• Eg: Samurai, Yankee, Bulldog, Kangaroo, Maple, Panda, etc
Panda Bonds:
• China’s version of foreign bonds
• Not accessible to many issuers
61 Bond Types
Types of bonds: Recent developments
Beneficial financial innovations in the debt market
Diaspora Bonds:
• Bonds issued by governments to be sold to their emigrants in rich
countries
• Example of use: to build bridges, flood control dams, clinics,
schools
• Emigrants: patriotic, more informed and understand the risk better,
personal interest
62 Bond Types
Social Impact Bonds:
• Social impact bonds (UK), pay for success bonds (US), social
benefit bonds (Aust), and development impact bonds (emerging
nations)
• Invest in social programs (by private service providers: more
effective and innovative than governments) with measureable
success markers
• Private investors will receive payouts (by government) only when
markers are met
• Governments: payout must be budgeted
• For investors: more of a structured product than bond
63 Bond Types
Green Bonds:
• Sometimes called climate bonds
• Bonds issued for environmentally friendly investments
• Eg. Wind farm, solar energy, other renewable energy, zero-
emission cars, etc
• Usually comes with tax-exemption
• What is sufficiently green? Nuclear plants?
• Greenwashing: pretending to be green
• Industry guidelines and certifications
• According to the Climate Bond Initiative:

• 2020 H1 issuance reached US$92.1 bn (US$117.8 bn in H1
2019)
• 40% of these are
• Min US$500m
• Issued by either developed, emerging, or supranational
issuers
• 46 issues from 41 issuers
64 Bond Types
Catastrophic bonds (cat):
• Bonds that are issue to cover catastrophes, usually natural
disasters
• Can be issued by insurance companies to manage their risks by
sharing the risk with investors
• Investors in the bonds get above-market yields in exchange for the
risk that principal could be wiped out by a major disaster in a
specified area
• There have not been many instances where disasters have been
severe enough to wipe out the principal of the bonds
71 Bond Types
Pandemic bonds:
• Diseases outbreaks such as Ebola are getting more and more
common
• The World Bank set up a new Pandemic Emergency Financing
Facility (PEF) in 2017, to provide funding for
• 77 of the world’s poorest countries
• Six possible types of viruses outbreaks such as new influenza
viruses, coronaviruses (like SARS), and filoviruses (like Ebola)
• The PEF is funded through cash, bonds, derivatives, and donations
• Among which as the inaugural issue of a $425m pandemic bond
issue
• Investors forgo their principal when a virus reaches a predetermined
contagion level
• The issue was 200% oversubscribed.
• Buyers ranged from specialised catastrophe bond investors to
pension funds.
72 Bond Types
I. Interest Rates
1. Real vs Nominal
II. Debt Market

1. Bond recap
2. Types of bond
3. Yield curves
4. US Treasuries
76 Sem2 AY2020/21
3. Yield Curves
• Shows the graphical relationship between yield and maturity for
bonds of the same credit rating but different maturity
• Yield curves are normally constructed with T-bills and T-bonds

• No default risk?
• Low liquidity risk
• Bootstrapping: A procedure used to extract zero yields from
coupon paying bonds
• Possible shapes of the yield curve

• Upward sloping
• Flat
• Downward sloping
77 Yield Curves
I. Interest Rates
1. Real vs Nominal
II. Debt Market

1. Bond recap
2. Types of bond
3. Yield curves
4. US Treasuries
79 Sem2 AY2020/21
4. US Treasuries
• Issued by the US treasury to finance the national debt and other
federal government expenditures
• Backed by the full faith and credit of the US government and are
(seemingly) default free
• Pay relatively low yields
80 US Treasuries
Types of US Treasury securities
• Treasury Bills
• Discount Security
• Maturity of one year or less
• Treasury Notes
• Coupon Security, semi-annual coupons
• Maturity between 2 to 10 years
• Treasury Bonds
• Coupon Security, semi-annual coupons
• Maturity between 10 to 30 years
81 US Treasuries
Types of US Treasury securities
• Treasury Strips
• A treasury security in which the periodic interest payment is
separated from the final principal payment
• Effectively creates 2 sets of securities--one for semi-annual
interest payment, one for the final principal payment
• Created by US treasury in response to separate trading of
treasury security principal and interest
• Separate Trading of Registered Interest and Principal of
Securities (STRIPS)
82 US Treasuries
Municipal securities (“munis”)
• Not issued by the US Treasury
• Issued by state and local governments and authorities
• To fund temporary imbalances or LT capital outlays such as school
construction, public utility construction or transportation systems
• Tax receipts or revenues generated are the source of repayment
• Attractive to household investors because in most cases, interest
income (but not capital gains) are tax exempt
83 US Treasuries
I. Interest Rates
1. Real vs Nominal
II. Debt Market

1. Bond recap
2. Types of bond
3. Yield curves
4. US Treasuries
84 Sem2 AY2020/21
Brief history of SGS:
• Prior to 1975, interest rates are set daily by the Association of
Banks in a Cartel-like environment
• 1923: First issues of 91-day T-bills
• 1974: 182-day T-bills
• 1975: 273-day and 364-day T-bills
• Prior to 1973, MAS will sell T-bills to any investors (banks and
other financial institutions) at a discount based on pre-announced
fixed rates
• There were no issues between May 1983 and July 1987
85 SGS
Brief history of SGS
• Unlike many other countries, the Singapore Government does not
need to finance its expenditures through the issuance of
government bonds as it operates a balanced budget policy and
often enjoys budget surpluses (as far as possible).
• SGS were initially issued to meet banks' needs for a risk-free
asset in their liquid asset portfolios.
• In 1998, MAS spearheaded efforts to enhance the efficiency
and liquidity of the SGS market as part of its strategy to
develop Singapore as an international debt hub.
• Since then, the SGS market has grown significantly, making it
one of the fastest developing bond markets in Asia.
86 SGS
Principal objectives of developing the SGS market
• Provide a liquid investment alternative with little or no default risk
for individual and institutional investors
• Establish a liquid government bond market which serves as a

benchmark for the corporate debt securities market
• Encourage the development of skills relating to fixed income

securities and broaden the spectrum of financial services available
in Singapore
87 SGS
SGS recent developments
• Since May 2000, MAS has embarked on an issuance program
aimed at building large & liquid benchmark bonds. This is
achieved through larger issuance of new SGS bonds & re-
openings of existing issues, thereby enlarging the free float.
• MAS issues T-bills and bonds on a regular basis:

• According to issuance calendar
• MAS bills: 4-week and 12-week
• T-bills: 6-month and 1-year
• SGS bonds: 2-year to 30-year
• SGS are now listed on the Singapore Exchange.

• As at December 2020:
• Size of SGS market at $325.2 billion ($60 bn T-bills; $128.9 bn
MAS-bills; $136.3 bn T-bonds)
88 SGS
Types of SGS
• MAS-bills and T-bills
• Minimum denomination = $1,000
• Zero coupon, issued and traded on discount basis
• T-Bonds
• 2, 5, 10, 15, 20, 30 years
• Minimum amount = $1,000
• Coupon issue (semi annual payment)
89 SGS
Primary market of SGS
• Competitive and non-competitive bidding
• Total non-competitive allotment is subject to a limit of 40% of
issue.
• Non-competitive bids allotted first, then competitive bids from
lowest to highest yields.
• Uniform price auction: Successful bids will be allotted at the same

uniform yield (highest accepted yield)
90 SGS
Auction of T-bills and T-bonds: Example
• Amount offered: $250m
• Non-competitive bids = $50m (satisfied in full)
• Remainder of $200m allotted to competitive bids
• Competitive Bids
Bidder Amount Yield

A 10m at 4.5%
B 30m at 4.67%
C 40m at 5.00%
D 80m at 5.25%
E 100m at 5.5%
others 150m > 5.5%
91 SGS
Auction of T-bills and T-bonds: Example
• Auction of T-bills and T-bonds
• Cutoff yield = ______
• Uniform pricing at cut-off yield for both competitive and non-
competitive bidders
• SGS: uniform pricing
• If non-uniform pricing, the average yield is computed as below:

Ave yield
= ____________________________________
= 5.1255%
= 5.125% (round down to nearest 1/8%)
• NOTE: the yield for T-bills is discount yield (recall T-bill futures)
96 SGS
Singapore Savings Bond
• A special type of Singapore Government Securities (SGS) with
features that make them suitable for individual investors
• Provides a long-term savings option that offers safe returns, for
Singaporeans
• Backed by the full faith of the Singapore Government
• First issued in October 2015
• New issue every month (for at least 5 years)
• Non-negotiable
• 10-year bonds but redeemable at par in any month (paid out on
the 1st business day of every month)
99 SGS
Singapore Savings Bonds
• CDP account needed
• Application through local banks’ ATMs or internet banking: min
$500
• Holding limit: $200,000
• Redeem through local banks
• Interest rate: step-up – the longer the holding period, the higher
the rate
• Eg: the issue in 4th January 2021 (January 2020) ranges from
0.27% (1.52%) in year 1 to 1.14% (1.86%) in year 10 [i.e. average
holding period returns of 0.27% (1.52%) to 0.66% (1.68%)]
• Public response fluctuating: see the volume.
100 SGS
I. Interest Rates
1. Real vs Nominal
II. Debt Market

1. Bond recap
2. Types of bond
3. Yield curves
4. US Treasuries
101 Sem2 AY2020/21
Singapore corporate debt market
The Corporate Debt Market:
• Global:
• 2019
• Softening global economy and heightened trade tensions
• Corporate bond issuance increased by 8% to US$7.22 tn
• Asia ex-Japan issuance grew by 12% to US$1.52 tn
• 2020
• COVID-19 pandemic
• Asia ex-Japan G-3 bond issuance fell from US$ 52 bn in Jan
to a US$ 8 bn in Mar
Source: The Monetary Authority of Singapore
102 SGP Corporate Debt Mkt
The Corporate Debt Market:
• Singapore:
• 2019
• Singapore total issuance was flat at S$95bn
• Total outstanding corporate debt securities grew 10.2% to
S$420 bn at end of 2019
• 2020
• Bond market gradually reopened towards the end of Q2
• Global-Asia Bond Grant Scheme replaces Asian Bond Grant
Scheme
• Max funding increase to S$800K for jumbo issuances

FM03 Debt MKT 0208

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FM03 Debt MKT 0208

Uploaded by

Copyright:

Available Formats

FIN3103B/3703B

Dr. YUE Ling

II. Debt Market

• Real interest rate:

or Nominal rate ≈ Real rate + Inflation rate

• Example: Nominal rate = 10%, inflation rate = 5%, tax rate = 5%

• Real rate (no tax) ≈ ______________

• Both fiscal and monetary policies will hurt the economy

II. Debt Market

• APR: Annual percentage rate

• Often, quoted rate APR EAR. So we need to calculate EAR,

Basis (1): Flat basis

Total interest = $100,000 x 0.1 x 3 = $30,000

Input: PV = _______, PMT = ______, n = _____(number of

Basis (1): Flat basis

Total interest = $100,000 x 0.1 x 3 = $30,000

Input: PV = 100,000, PMT = - 3,611.11, n = 36 (number of

Basis (2): Discounted flat basis

Principal + interest = $100,000/(1-(0.1 x 3))

Input: PV = _______, PMT = _________, n = _________

Basis (3): Annual rest

Monthly payment = $40,211.48/12 = $3,350.96

Input: PV = __________, PMT =__________, n = ________

Basis (4): Declining balance

Input: PV = 100,000, i = 0.83%, n = 36

Compare the monthly payment:

Or, compare the EAR:

II. Debt Market

price = ? $100 $100 $100 $100 $1,100

100 100 100 100 1100

• Example: Par value = $1,000, current price = $750, maturity = 5

• YTM of a zero-coupon bond = 𝑖

• Change of interest rate affects debt instruments in two ways

• The default free, short-term, real interest rate is adjusted for:

II. Debt Market

Perpetual bonds: Pays a constant stream of coupon forever, i.e.

Pure discount bonds (zero-coupon bond or zeros): Bonds that

Convertible bonds: Bonds that allow holders to convert bonds to

Floating rate bonds: Bonds with coupon payments that are

Asian Dollar Bonds:

Dim Sum Bonds:

Beneficial financial innovations in the debt market

• According to the Climate Bond Initiative:

II. Debt Market

• Yield curves are normally constructed with T-bills and T-bonds

• Possible shapes of the yield curve

II. Debt Market

• Pay relatively low yields

II. Debt Market

• Establish a liquid government bond market which serves as a

• Encourage the development of skills relating to fixed income

• MAS issues T-bills and bonds on a regular basis:

• SGS are now listed on the Singapore Exchange.

• Uniform price auction: Successful bids will be allotted at the same

Bidder Amount Yield

• If non-uniform pricing, the average yield is computed as below:

II. Debt Market

Source: The Monetary Authority of Singapore

Source: The Monetary Authority of Singapore

Source: The Monetary Authority of Singapore

Source: The Monetary Authority of Singapore

Source: The Monetary Authority of Singapore

Source: The Monetary Authority of Singapore

Input: PV = _, PMT = , n = _(number of

Input: PV = ___, PMT = _, n = _____

Input: PV = , PMT =, n =