Complete post-module assignment for the course Fixed Income Instruments. The attachments are NOT the assignment. It is the in-class exercises/cases and the assignment will be based on the excel summary. The assignment solution should include all of the data in the sample solution. The assignment questions will not be provided until I log in to Canvas and share the questions. As soon as I log in the timer starts and I have five hours to complete the entire assignment. The expert will contact me when he is ready and we will log in together. We can select any time to do this. There will be six questions with multiple parts and computations. I must show all of my work, provide the data, answers, and excel work. I will need the answers to be highlighted so I can transfer to text boxes in Canvas. I must also submit one excel file with all of the answers with one tab for each question AND the answers via text as well.
Fixed Income Instruments and Markets Professor Jennifer N. Carpenter NYU Stern School of Business 1 GDP of Top Seven Economies, Trillion USD 2007-2025 2 0 5 10 15 20 25 30 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 US China Japan Germany India UK France Global Economic Overview Country/ Continent 2020 GDP $T GDP Growth Rate Pop. B GDP per Capita $K Pop. per km2 Med. Age US 21 -2.9% 0.33 63 36 38 China 15 3.2% 1.40 10 153 37 Japan 5 -3.3% 0.13 39 346 49 Germany 4 -2.1% 0.08 45 237 48 India 3 -9.6% 1.35 2 464 28 UK 3 -6.8% 0.07 39 281 41 France 3 -6.1% 0.07 39 119 41 Asia 32 4.46 7 150 32 North America 24 0.52 48 19 35 Europe 22 0.75 29 34 43 South America 3 0.43 9 25 32 Africa 2 1.35 2 45 20 3 The two largest economies and global growth drivers have very different financial systems… Country 2020 GDP $T 2025 GDP $T % of Global Growth US 21 25 17% China 15 23 28% Japan 5 6 4% Germany 4 5 4% India 3 4 5% UK 3 3 2% France 3 3 3% Country Bank Assets $T Bond Mkt $T Stock Mkt $T Total $T US 20 45 36 101 China 47 17 11 75 • The US financial system is dominated by its securities markets. • China’s financial system is dominated by its state-owned banks. 4 Sell-side Buy-side Intermediaries Intermediaries 290% Bank Assets 100% Bank Loans 50% Mutual Funds 105% equity, fixed income, GSEs 30% money market, mortgage, etc. Other Fin’l Insts ETFs 20% Hedge Funds 15% Markets equity long-short, Stock Market 170% fixed income arb, EM, global macro, etc. Bond Market 215% Other Inst’l Investors Repo Market 20% pension funds 150% insurance cos, Internet Finance Derivatives Markets (where IR, FX, and Equity directional & volatility risks are unpacked from capital and traded separately) MBS/ABS The US Financial System (% of $21T GDP) Financial System Assets/ Issuers Consumers Firms Governments Financial System Liabilities/ Investors Households Family Offices Corporate Lenders Sovereign Wealth Funds Regulators – Government, central bank, bank and markets regulators credit cards mortgages MBS/ABS loans credit lines 5 WMPs 25% China’s Financial System (% of $15T GDP) Financial System Assets/ Issuers Consumers SOEs SMEs Local Gov’ts/LGFVs Central Gov’t Sell-side/Buy-side Intermediaries Bank Assets 315% Bank Loans 170% Trusts/Shadow Banks 60% Financial System Liabilities/ End Investors Households HNW Individuals Corporate Lenders Markets Stock Market 75% Bond Markets 115% Repo Markets 25% Funds Mutual Funds 17% Pension Funds Hedge Funds (with limited shorting ability) credit cards mortgages Loans/ Credit Lines Indirect credit extension Entrusted Loans 10% P2P 1% Regulators – Government, central bank, bank and markets regulators Internet Finance 15% Deposits 220% Structured Deposits 10% 6 Debt Markets in the US and China Readings • Amstad and He, “Chinese Bond Market and Interbank Market,” in The Handbook of China’s Financial System http://www.zhiguohe.com/uploads/1/0/6/9/106923057/handbookchinafinan cialsystem_ch6_bondmarket_20181001.pdf • Amsted and He, “Underestimated Role of Banks in China’s Bond Market” http://www.voxchina.org/show-3-137.html 7 http://www.zhiguohe.com/uploads/1/0/6/9/106923057/handbookchinafinancialsystem_ch6_bondmarket_20181001.pdf http://www.voxchina.org/show-3-137.html 8 0 5 10 15 20 25 30 35 US Eq uit y Tre asu rie s Mo rtg ag e R ela ted Co rpo rat e D eb t Ag en cie s Mo ne y M ark ets As set -Ba cke d Mu nic ipa l Market Value of US Debt and Equity Markets, in $Trillions 2013 2014 2015 2016 2017 2018 2019 2020 Sources: World Bank, SIFMA 9 0 100 200 300 400 500 600 700 NYSE Treasuries Agencies Corporate Debt Agency MBS Municipal Average Daily Trading Volume, in $Billions 2013 2014 2015 2016 2017 2018 2019 2020 Sources: NYSE and SIFMA 10 0 50 100 150 200 250 300 350 400 450 500 FX Fo rw ard s a nd sw ap s FX cu rre nc y s wa ps FX op tio ns Int er est ra te fut ure s/f orw ard s Int er est ra te sw ap s Int er est ra te op tio ns Cr ed it d efa ult sw ap s Eq uit y f or wa rds an d s wa ps Eq uit y o pti on s Co mm od ity co ntr ac ts Notional Amounts of Derivatives Outstanding, in $Trillions 2012 2013 2014 2015 2016 2017 2018 2019 Sources: BIS and eurexchange The US Mortgage Market and the Broader Fixed Income Markets 30-Year Fixed-Rate Mortgage •Default Risk •Diversifiable risks •Duration •Embedded options •Capital Financial System •FNMA – insures against default, pools risks • Interest Rate Swaps Market •Caps & Swaptions Market •Mortgage/MBS Funds •Money Market Funds Investors Households & Institutional Investors • The massive US fixed-rate mortgage market emerged from regulation dating back to the 1930s Depression-era New Deal. • This market has helped shape the broader markets for fixed income securities, derivatives, and asset management, which intermediaries depend on to manage and allocate interest rate risk. • Understanding the underlying bond math and fixed income option pricing helps clarify how all these markets fit together. 11 China’s Big Four Commercial Banks •ICBC – 66% state-owned •CCB – 57% state-owned •ABC – 75% state-owned •BOC – 64% state- owned • Developed 1979-1984, carved out of parts of the PBoC. • Partially privatized after 2005, but still majority state-owned. 12 Four Partner “Asset Management Companies”(AMCs) • Created after 1997 Asian financial crisis to buy banks’ NPLs, strengthen the banking sector, and prepare for China’s 2001 entrance to the WTO. • Purchased 2.4T RMB of loans in exchange for low-coupon bonds. • Recovery rate on ultimate sale of loans estimated 24-40%. • Diversified into other business lines over the last decade. • Directed to re-focus on NPLs in January 2018. 13 Three Policy Banks • Long-term financing for infrastructure and other major development projects (petrochemical engineering, car- manufacturing, electronics) • Agriculture and rural policy related financing • Financier for exporting and importing companies and creditor for international loans 14 Source: WIND 15 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Industrial and Commercial Bank of China China Construction Bank Agricultural Bank of China Bank of China China Postal Savings Bank Bank of Communications China Merchant Bank Industrial Bank SPD Bank CITIC Bank China Minsheng Bank China Everbright Bank Ping An Bank Huaxia Bank Bank of China (Hong Kong) Bank of Beijing China Guangfa Bank Bank of Shanghai Bank of Jiangsu China Zheshang Bank Top 20 China Financial Institutions by Total Assets 2019 $Trillions China – The World’s Largest Investor 2017 ADB report finds China is the only developing Asian country that has kept up with investment in power, transport, and sanitation systems. Source: Financial Times16 China’s Debt-to-GDP Ratio (BIS) • Rapid growth in corporate debt. IMF estimates 14% of firms’ have earnings insufficient to cover debt service. • Some fear China is approaching a Minsky moment. • Others view banks, SOEs as instruments of China’s fiscal policy, making their debt more comparable to sovereign than corporate. 17 0.00% 50.00% 100.00% 150.00% 200.00% 250.00% 300.00% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Government Household Non-financial Corporate Debt-to-GDP Ratios in Ten Largest Economies (BIS) • Governments have financed economic stimulus in different ways. 18 0.00% 50.00% 100.00% 150.00% 200.00% 250.00% 300.00% 350.00% 400.00% USA China Japan Germany UK India France Brazil Italy Canada Government Household Non-financial Corporate China Foreign Exchange Reserves 19 Administered Lending and Deposit Rates in China Lending rate Deposit rate 20 China’s Debt-to-GDP Ratio (PBoC) • Growth of the shadow banking sector: • Informal interest rate liberalization policy? • A way for banks to circumvent lending restrictions? • Driver of new municipal bond markets? Source: PBOC as of 2020 Q3 21 0% 50% 100% 150% 200% 250% 300% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Central Government Debt Corporate Bonds Entrusted Loans, Trust Loans and Banker's Acceptance Bank Loans Bond Market Growth in China 2002-2020 Source: Wind as of Nov 201922 - 20.00 40.00 60.00 80.00 100.00 120.00 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 Market Value Trillion CNY Other Corporate Bonds Enterprise Bonds Other Financial Bonds Negotiable Certificate of Deposit Other Government Bonds Policy Bank Bonds Municipal Bonds Treasury Bonds China’s Bond Market is Now Second Largest in the World $Billions Source: BIS as of 2019 Q123 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 Un ite d S tat es Ch ina Ja pa n Un ite d K ing do m Fra nc e Ge rm an y Ca na da Ita ly Ne the rla nd s Sp ain Au str ali a Lu xe mb ou rg Ire lan d Most bonds are listed and traded in the Inter-Bank Market, though some are traded on the stock exchanges or OTC. Source: Wind as of Nov 201924 0.00 20.00 40.00 60.00 80.00 100.00 120.00 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Bond Outstanding by Market in CNY Trillion Inter-Bank SHSE SZSE Inter-Bank&SHSE&SZSE Inter-Bank&OTC Inter-Bank&SHSE&SZSE&OTC Others 0 20 40 60 80 100 120 140 160 180 200 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Bond Trading Volume by Market in CNY Trillion Inter-bank SHSE SZSE Bond Investor Composition 2020 ★Commercial banks are still by far the biggest holders of Chinese bonds. Data source: Chinabond, Major Bonds Holding Structure. 25 Commercial Bank Unincorporated Product Foreign Investor Insurance Insitution Exchange Market Policy Bank Others Inter-Bank Market Securities Company Credit Cooperatives OTC Market Other Financial Institution Fund Company & Foundation Free Trade Zone Market Non-financial Institution China’s Bond Market Opens Up to Global Investors • In Feb 2016, the PBoC announced the opening of China’s interbank market to foreign investors. • In Jan 2017, Bloomberg announced the inclusion of some CGB in some of its Bloomberg Barclays aggregate indexes. • In Apr 2019, Bloomberg added over 300 CGBs to bond index. • In Sep 2020, FTSE Russell added CGB to its key indexes. • Foreign ownership of CGB has risen from 4% to 9% since 2017. • Foreign ownership of broader Chinese bond market is only 2.4%. • As we shall see, CGB returns have low correlation with US Treasury bond returns. Thus, global bond investors might