Brady Bonds Pallavi Rao Morris Chen. Brady Bonds Buy Mexican par or discount bonds Buy Mexican par...

Brady BondsBrady Bonds

Pallavi RaoPallavi Rao

Morris ChenMorris Chen


Buy Mexican par or discount bondsBuy Mexican par or discount bonds Buy Venezuela par or discount bondsBuy Venezuela par or discount bonds Fair opening price of Costa Rican Principal Fair opening price of Costa Rican Principal

Series ASeries A Hold or sell Mexican Brady Bond at Nov Hold or sell Mexican Brady Bond at Nov

20032003 Useful Diversification ToolUseful Diversification Tool Method amp estimate of country risk with Method amp estimate of country risk with

Brady BondBrady Bond Hedge Mexican exposureHedge Mexican exposure Probability of default in the FutureProbability of default in the Future

What is a Brady BondWhat is a Brady Bond

1048766 Principal collateral 1048766 Rolling-interest guarantee 1048766 Value recovery rights

1048766 Par bonds 1048766 Discount bonds

Mexico ParDiscountMexico ParDiscount

Par DataPar Data

T-Bond 30 Yrs YTMT-Bond 30 Yrs YTM856856

T-Bill 1 YrT-Bill 1 Yr 835835 Country Risk Country Risk CCCCCC 500500 Bond YTMBond YTM

13351335 Coupon InterestCoupon Interest 625625 Face ValueFace Value 100100 Prob of DefaultProb of Default 400400

Discount DataDiscount Data



13351335 LIBOR + 1316LIBOR + 1316 931931 Face ValueFace Value 100100 Prob of DefaultProb of Default 400400


Mexico ParMexico Par

NPV = 4088NPV = 4088 Mexico DiscountMexico Discount

NPV = 5672NPV = 5672

Recommendation Recommendation Buy Mexico ParBuy Mexico Par

Venezuela ParDiscountVenezuela ParDiscount

Par DataPar Data

T-Bond 30 Yrs YTMT-Bond 30 Yrs YTM824824 T-Bill 1 YrT-Bill 1 Yr 705705 Country Risk Country Risk CC 800800 Bond YTMBond YTM 15051505 Coupon InterestCoupon Interest 675675 Face ValueFace Value 100100 Prob of DefaultProb of Default 600600


T-Bond 30 Yrs YTMT-Bond 30 Yrs YTM824824 T-Bill 1 YrT-Bill 1 Yr 705705 Country Risk Country Risk CC 800800 Bond YTMBond YTM 15051505 LIBOR + 1316LIBOR + 1316 931931 Face ValueFace Value 100100 Prob of DefaultProb of Default 600600


Venezuela ParVenezuela Par

NPV = 3666NPV = 3666 Venezuela DiscountVenezuela Discount

NPV = 4703NPV = 4703

Recommendation Recommendation Buy Venezuela ParBuy Venezuela Par

Costa Rica Principal Costa Rica Principal Series ASeries A

Principal Series A DataPrincipal Series A Data

T-Bond 30 Yrs YTMT-Bond 30 Yrs YTM 773773 T-Bill 1 YrT-Bill 1 Yr 832832 Country Risk Country Risk CCCC 650650 Bond YTMBond YTM 14821482 Coupon InterestCoupon Interest 625625 Face ValueFace Value 100100 Prob of DefaultProb of Default 500500


Costa Rica Principal Series ACosta Rica Principal Series A

NPV = 4915NPV = 4915

Hold or Sell Mexico Hold or Sell Mexico Brady BondBrady BondPar Data as 112003Par Data as 112003

T-Bond 30 Yrs YTMT-Bond 30 Yrs YTM 515515 T-Bill 1 YrT-Bill 1 Yr 171171 Country Risk BBCountry Risk BB 450450 Bond YTMBond YTM 621621 Coupon InterestCoupon Interest 625625 Face ValueFace Value 100100 Prob of DefaultProb of Default 300300

Hold or Sell Mexico Hold or Sell Mexico Brady BondBrady Bond

Mexico Par as of 112003Mexico Par as of 112003

NPV = $6883NPV = $6883

Current Selling Price = $10000Current Selling Price = $10000

Recommendation Recommendation Sell Mexico ParSell Mexico Par

Useful Diversification Useful Diversification ToolTool

Approx 60 variance in Mexican Approx 60 variance in Mexican par prices is attributable to changes par prices is attributable to changes in US Treasuryin US Treasury

Conclusion High correlation between Conclusion High correlation between Mexican Brady Bonds and US Mexican Brady Bonds and US Treasury Therefore not a good Treasury Therefore not a good diversification tooldiversification tool

Estimate Country Risk with Estimate Country Risk with Brady BondBrady Bond

Brady Bond YTM = US T-bill + Brady Bond YTM = US T-bill + SpreadSpread

Therefore Therefore

Country Risk = Brady Bond YTM ndash Country Risk = Brady Bond YTM ndash Risk Free YTMRisk Free YTM

Hedge Mexican ExposureHedge Mexican Exposure

Brady Bond has two risk componentsBrady Bond has two risk components

Sovereign Risk (Countryrsquos political amp econ Sovereign Risk (Countryrsquos political amp econ Risk)Risk)

Interest Rate Risk (US Interest rate Interest Rate Risk (US Interest rate fluctuations)fluctuations)

Solution Solution

Hedge Interest Rate Risk with CBOT bond Hedge Interest Rate Risk with CBOT bond futuresfutures

Hedge Sovereign Risk with put options in Hedge Sovereign Risk with put options in MexicoMexico

Probability of DefaultProbability of Default

Country Risk Ranking = Country Risk Ranking = 4747 (100 (100 most risky)most risky)

Brady Bond buybacksBrady Bond buybacks Political Risks = Political Risks = CC Economic Policy Risk = Economic Policy Risk = BB Economic Structure Risk = Economic Structure Risk = CC Liquidity Risk = Liquidity Risk = CC Overall Risk = Overall Risk = CC


Buy Mexican par or discount bondsBuy Mexican par or discount bonds Buy Venezuela par or discount bondsBuy Venezuela par or discount bonds Fair opening price of Costa Rican Principal Fair opening price of Costa Rican Principal

Series ASeries A Hold or sell Mexican Brady Bond at Nov Hold or sell Mexican Brady Bond at Nov

20032003 Useful Diversification ToolUseful Diversification Tool Method amp estimate of country risk with Method amp estimate of country risk with

Brady BondBrady Bond Hedge Mexican exposureHedge Mexican exposure Probability of default in the FutureProbability of default in the Future





Par DataPar Data











NPV = 5672NPV = 5672



Par DataPar Data







NPV = 4703NPV = 4703







NPV = 4915NPV = 4915





NPV = $6883NPV = $6883








Therefore Therefore






Solution Solution










Par DataPar Data











NPV = 5672NPV = 5672



Par DataPar Data







NPV = 4703NPV = 4703







NPV = 4915NPV = 4915





NPV = $6883NPV = $6883








Therefore Therefore






Solution Solution









NPV = 5672NPV = 5672



Par DataPar Data







NPV = 4703NPV = 4703







NPV = 4915NPV = 4915





NPV = $6883NPV = $6883








Therefore Therefore






Solution Solution







Par DataPar Data







NPV = 4703NPV = 4703







NPV = 4915NPV = 4915





NPV = $6883NPV = $6883








Therefore Therefore






Solution Solution









NPV = 4703NPV = 4703







NPV = 4915NPV = 4915





NPV = $6883NPV = $6883








Therefore Therefore






Solution Solution











NPV = 4915NPV = 4915





NPV = $6883NPV = $6883








Therefore Therefore






Solution Solution










NPV = $6883NPV = $6883








Therefore Therefore






Solution Solution











Therefore Therefore






Solution Solution










Solution Solution






Brady Bonds Pallavi Rao Morris Chen. Brady Bonds Buy Mexican par or discount bonds Buy Mexican par...

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