Coupon Bonds Research Articles

Corporate bond coupon prediction based on deep learning

As the second largest bond market in the world, China's bond market has attracted extensive attention in recent years. Given its importance in facilitating financing arrangements and informing investment decisions, accurate bond coupon prediction is valuable. This paper proposes an ensemble model combining TabNet, DeepFM, and XGBoost for predicting the coupons of investment-grade corporate bonds. Specifically, to optimize the hyperparameters of the proposed model, an improved butterfly optimization algorithm incorporating the concepts of good point sets, refraction opposition-based learning, switching probability adjustment, and Solis & Wets search strategies is developed. Extensive experiments using data on China's investment-grade corporate bonds demonstrate the superior performance of the proposed model in the accuracy of bond coupon predictions. Additionally, the importance of various features has been discussed. The results show that the base interest rate for valuation and term to maturity are important to bond coupon predictions obtained by the proposed model.

Instantaneous volatility of the yield curve, variance risk premium and bond return predictability

This paper proposes a new way of estimating the instantaneous volatility of fixed income securities using derivatives data, which can further be used to construct the corresponding yield curve variance risk premium (VRP). We show that this VRP measure exhibits strong long-horizon predictive power for bond excess returns. After controlling for the shape of the yield curve, the VRP strongly predicts 1-year holding period excess returns for 2-year to 10-year zero coupon bonds. The marginal R2 of VRP is as high as 12.6%. One standard deviation increase in the VRP is associated with 2.224% increase in the bond excess return. This result is robust when we include various other bond return predictors, such as the Cochrane–Piazzesi “tent-shaped” factor. The out-of-sample analysis suggests that this predictability is not only statistically significant, but also can be translated into economic gains. Additional tests suggest that this predictability varies with economic conditions.

Fair valuations of insurance policies under multiple risk factors: A flexible lattice approach

AbstractWe propose a flexible lattice model to evaluate the fair value of insurance contracts embedding both financial and actuarial risk factors. Flexibility relies on the ability of the model to manage different specifications of the correlated processes governing interest rate, mortality, and fund dynamics, thus allowing the insurer to make the most appropriate choices. The model is also able to handle additional guarantees like a surrender opportunity for which explicit formulae are not available being it similar to an American derivative. The model discretizes mortality and interest rate dynamics through two different binomial lattices and then combines them into a bivariate tree characterized by the presence of four branches for each node. The probability of each branch is defined to replicate the correlation affecting the two processes. The bivariate model is useful to compute the value of survival zero coupon bond. When adding another source of risk, such as the fund dynamics for evaluating fund-linked insurance products, we model it through a bivariate tree that captures the influence of the interest rate on its drift term. Then, the mortality risk is embedded by defining a trivariate tree presenting eight branches emanating from each node with probabilities defined in order to capture the correlations of the processes. Extensive numerical experiments assess the model accuracy by considering some stylized policies, but the model application is not limited to them being it able to manage different contract specifications.

A LÉVY-DRIVEN ORNSTEIN–UHLENBECK PROCESS FOR THE VALUATION OF CREDIT INDEX SWAPTIONS

A Lévy-driven Ornstein–Uhlenbeck process is proposed to model the evolution of the risk-free rate and default intensities for the purpose of evaluating option contracts on a credit index. Time evolution in credit markets is assumed to follow a gamma process in order to reflect the different speed at which credit products are exchanged with respect to securities, such as Treasuries, deemed risk-free. Formulas for the characteristic function, zero coupon bonds, moments of the process and its stationary distribution are derived. Numerical experiments showing convergence of standard numerical methods for the valuation PIDE to analytical and Monte Carlo solutions are shown. Calibration to market prices of options on a credit index is performed, and model- and market-implied summary statistics for the underlying credit spreads are estimated and compared.

Tax Shields, the Weighted Average Cost of Capital, and the Appropriate Discount Rate for a Project with a Finite Useful Life

The standard formulas for calculating the value of a firm’s tax shield and its weighted average cost of capital (WACC) use the assumption that the underlying cash flows are perpetuities. Yet, most projects will have a finite useful life. Because the perpetuity approach will overstate the value of a finite-life project’s tax shield, this factor will pressure the perpetuity-formula WACC to be less than the finite-life WACC. However, a large portion of the value of a perpetual tax shield can be attributed to interest payments during the next 5, 10, or 25 years, making it possible for the perpetuity-formula WACC to be greater than the finite-life WACC. Using a series of numerical examples, this paper shows that the finite-life WACC can be either higher or lower than the perpetuity-formula WACC depending on the project’s useful life, the required return on the unlevered project, the firm’s capital structure, the cost of debt, the marginal tax rate, and the debt repayment pattern (e.g., coupon bonds or amortizing loans). The analysis in this article helps managers better understand the potential biases introduced into the capital budgeting process when using the perpetuity-formula WACC to evaluate projects with finite useful lives.

On the yield to maturity of a coupon bond

The article is devoted to one of the main characteristics of the bond-the yield to maturity. The subject of the study is the type of yield to maturity indicator. It is known, that there are two approaches to determining the yield to maturity of a bond: the nominal interest rate and the effective interest rate method. The relevance of the study is due to the fact that, as preliminary comparison has shown, these two approaches to determining the yield to maturity may be unequal in research. The purpose of this paper is to conduct a study of the dependence of the research results on the type of yield to maturity indicator. For this purpose, the problem of the dependence of the interest rate risk of a bond on the number of coupon payments per year was chosen. The literature contains reports on the dependence on the frequency of coupon payments over the term a bond that evaluates interest rate risk. The problem of the dependence directly of the interest rate risk of a bond on the number of coupon payments per year has not been considered in the literature. The task was set to determine which of the two approaches to determining the yield to maturity allows us to obtain results for interest rate risk that are consistent with the dependence of the duration of the bond on the number of coupon payments per year. Methods of differential calculus are used to solve the problem. As a result, it was proved that the use of the yield to maturity determined by the effective interest rate method allows us to obtain results consistent with the dependence of the duration of the bond on the number of coupon payments per year. The results obtained by using the yield to maturity determined by the nominal interest rate method do not agree with the dependence of the duration of the bond on the number of coupon payments per year. It is concluded that the yield to maturity determined by the nominal interest rate method in research may lead to incorrect results, in contrast to the yield to maturity in the form of an effective interest rate. Results of the work can be useful to both the bond issuer and the investor, as well as in theoretical studies of investments in bonds.

Asymptotics for the Laplace transform of the time integral of the geometric Brownian motion

We present an asymptotic result for the Laplace transform of the time integral of the geometric Brownian motion F(θ,T)=E[e−θXT] with XT=∫0TeσWs+(a−12σ2)sds, which is exact in the limit σ2T→0 at fixed σ2θT2 and aT. This asymptotic result is applied to pricing zero coupon bonds in the Dothan model of stochastic interest rates. The asymptotic result provides an approximation for bond prices which is in good agreement with numerical evaluations in a wide range of model parameters. As a side result we obtain the asymptotics for Asian option prices in the Black-Scholes model, taking into account interest rates and dividend yield contributions in the σ2T→0 limit.

Bonds with Variable Coupon as Alternative Source of State Financing for Oil and Gas Industry

The article studies the problem of searching for financing by companies of oil and gas industry. On the one hand, projects in the industry can be highly beneficial in case of positive macro-economic situation, on the other hand, such projects require serious financing on the investment stage. The goal of the research is to develop an alternative mechanism of financing oil and gas industry by bonds with variable coupon rate, which is based on the interest rate of the Central Bank of the Russian Federation, current prices on crude oil of the Urals brand, base price on crude oil fixed in accordance with the Budget Code of the Russian Federation and actual level of oil production. As a result of the research a mechanism of the floating bond coupon was developed, which is not limited in size in case of high oil prices. This mechanism is based on the current interest rate. Unrecoverable budget losses in the budget system are absent in case of granting standard investment privileges for oil and gas projects. Moreover, if situation in oil prices is positive, state can get higher coupon profit on such bonds. The given type of bonds is an alternative source of financing oil and gas projects on the part of state.

ОБЛИГАЦИИ ДЛЯ НАСЕЛЕНИЯ КАК НОВЫЙ ИНСТРУМЕНТ ФИНАНСИРОВАНИЯ ЭКОНОМИЧЕСКОГО РАЗВИТИЯ РОССИЙСКОЙ АРКТИКИ

The purpose of this study is to investigate the feasibility of issuing Arctic bonds as a means to attract public savings for implementing investment projects aimed at developing the Russian Arctic. The article examines methodological approaches to issuing bonds to the public and analyzes Russian and foreign practices in this area. The study established that if the parameters and conditions for issuing bond loans to the public are chosen rationally and the details of bond placement are effectively communicated to potential investors, the use of this tool can not only increase the public’s interest in the securities market but also engage free household savings in economic processes. The study also analyzed the possibilities and prerequisites for the effective placement of Arctic bonds. It was found that in the near future, financial resources allocated by the government for the development of the Russian Arctic will be limited. At the same time, the population of the Arctic is haracterized by a high level of savings, which makes it possible to issue bond loans to the public. The author has identified the key parameters for issuing Arctic bonds. It is advisable to issue them as book-entry coupon bonds with a maturity of five years and to use the Finuslugi online platform for placement. When fixing the coupon rate, it is recommended to use a dynamic approach with a focus on the average profitability of long-term bank deposits.The purpose of raising funds with the help of Arctic bonds is to co-finance projects included in the national program titled "Socio-economic development of the Arctic zone of the Russian Federation."

Mathematical Modeling of Sukuk

Data on sukuk issued so far shows that the majority of these have fixed coupon payments, which is equivalent to interest bearing fixed coupon bonds. Two mathematical models are reviewed that are proposed for risk-sharing and profit-sharing sukuk that is consistent with the principles of Islamic finance. The proposed sukuk are debt instrument – with stochastic coupons that depend on proxies for the profitability of the issuing firm. The first model is applicable to a sukuk with the issuer depending on a commodity like oil that has a transparent index for its price. An index-linked coupon bond, which is equivalent to a sukuk, pays coupons with values that are stochastic – depending on a market defined index – and has been proposed in Belal Ehsan Baaquie (2018a), Belal Ehsan Baaquie (2018b). The proposed model is studied by taking the index of the coupons to be based on the price of oil, given by Brent Crude Oil Index. In particular, a case study is reviewed by comparing fixed coupon bonds issued Petronas are compared with their corresponding sukuk with index-linked coupons Belal Ehsan Baaquie (2023). The second model is for sukuk issued by publicly listed firms; the coupons depend on the valuation of the issuing firm, which is taken to be a proxy of its profitability Belal Ehsan Baaquie (2020b), Belal Ehsan Baaquie (2020a). An empirical analysis of valuation based sukuk is reviewed to see its comparison with fixed coupon bonds Belal Ehsan Baaquie and Muhammad Mahmudul Karim (2022).

The origin of LYONs: A case study in financial innovation

The origin of LYONs: A case study in financial innovation

Cyber Loss Distribution Fitting: A General Framework towards Cyber Bonds and Their Pricing Models

Motivated by the considerable amount of losses in (finance) industry caused every year by the fast growing number of malicious cyber events and the need of an insurance against such cyber losses, we propose a general framework of cyber bond, whose main purpose is to insure (compensate) losses of a cyber attack. Based on a database of publicly available cyber events, we determine cyber loss distribution parameters and use them to numerically simulate cyber bond price, yield, and other characteristics. We also study two approaches to cyber bond coupon calculation.

Sukuk with Index-linked Coupons and Hedging: Case Study of Petronas

A sukuk (an Islamic debt instrument) is reasoned to be equivalent to an index-linked coupon bond that pays coupons with values that are stochastic — depending on a market defined index — has been proposed in Belal Ehsan Baaquie (2018a), Belal Ehsan Baaquie (2020). Oil is one of the most important commodities. The proposed model is studied by taking the index of the coupons to be based on the price of oil, given by Brent Crude Oil Index or WTI (West Texas Intermediate). In particular, a case study is carried out in which fixed coupon bonds issued Petronas are compared with a corresponding sukuk with index-linked coupons. A novel hedging procedure for the index-lined sukuk (coupon bond) can be defined using the underlying commodity on which the index is based: when the sukuk is issued a fixed quantum of the commodity can be allocated and ring-fenced for paying the coupons of the sukuk; the sale of this commodity provides the tangible asset that generates the revenue required for the future payments of the index-linked coupons for a wide variation of the index.

Pricing risky corporate bonds: An empirical study

AbstractThis paper empirically studies a model for pricing risky corporate bonds proposed by Baaquie—based on the seminal Merton. The proposed model provides an exact solution for the price of a risky corporate bond with a finite maturity and explains the market price of corporate fixed coupon bonds as being the result of the market risk that is carried by the bond. Baaquie's model is empirically tested using 42 fixed coupon bonds issued by 23 US corporations, between 2011 and 2017. It is found that the proposed model estimates most bond prices quite accurately. Market time (similar to the concept of psychological time), which is distinct from calendar time, is quantified in the paper and is an exogenous behavioral parameter that plays a pivotal role in improving the accuracy of the pricing model for long‐maturity risky bonds.

A note on the spot-forward parity under stochastic cost of carry

Existing spot-forward parities assume either a predictable cost of carry or a deterministic correlation between returns on the underlying asset price and the best-predicted convenience discount factor. We put forward a new spot-forward parity under any stochastic cost of carry. The forward price equals the spot price times a factor represented by the conditional expectation of the cost of carry accruing over the contract lifetime and computed using the martingale measure associated with the cumulative gain process that results from asset holding. We extend this result and derive a general pricing formula for contingent claims written on the forward price. These results apply to any asset that shows convenience revenue, e.g. a stock share, a coupon bond, foreign currency, and a commodity.

PENGARUH LIKUIDITAS, WAKTU JATUH TEMPO, DAN KUPON OBLIGASI TERHADAP HARGA OBLIGASI PADA PERUSAHAAN KORPORASI YANG TERDAFTAR DI BURSA EFEK INDONESIA

This study aimed to find out the effects of the variables of the Liquidity with the Current Ratio as its proxy, Maturity Date Duration, and Bond Coupon on the Bond Price of companies listed in Indonesia Stock Exchange. The period in the study was 4 years, from 2017 to 2020. The research population comprised 116 bonds of companies listed in Indonesia Stock Exchange in the periode 2017-2020. The sampel was selected by means of the purposive sampling technique and it consisted of 14 bonds of companies. The data analysis technique was panel regression analysis. Based on the results of the data analysis, partially the Current Ratio did not have an effect on the Bond Price, the Maturity Date Duration had a significant positive effect on the Bond Price, and the Bond Coupon had a significant positive effect on the Bond Price

Pricing risk-based catastrophe bonds for earthquakes at an urban scale

Catastrophe risk-based bonds are used by governments, financial institutions and (re)insurers to transfer the financial risk associated to the occurrence of catastrophic events, such as earthquakes, to the capital market. In this study, we show how municipalities prone to earthquakes can use this type of insurance-linked security to protect their building stock and communities from economic losses, and ultimately increase their earthquake resilience. We consider Benevento, a middle-sized historical town in southern Italy, as a case study, although the same approach is applicable to other urban areas in seismically active regions. One of the crucial steps in pricing catastrophe bonds is the computation of aggregate losses. We compute direct economic losses for each exposed asset based on high spatial resolution hazard and exposure models. Finally, we use the simulated loss data to price two types of catastrophe bonds (zero-coupon and coupon bonds) for different thresholds and maturity times. Although the present application focuses on earthquakes, the framework can potentially be applied to other natural disasters, such as hurricanes, floods, and other extreme weather events.

Analytically Pricing Formula for Contingent Claim with Polynomial Payoff under ECIR Process

Contingent claims, such as bonds, swaps, and options, are financial derivatives whose payoffs depend on uncertain future real values of underlying assets which emphasize various real-world applications. In general, valuations for contingent claims can be derived from the conditional expectations of underlying assets. For a simple process, the moments are usually directly obtained from its transition probability density function (PDF). However, if the transition PDF is unavailable in simple form, the derivations of the moments and the contingent claim prices will not be accessible in closed forms. This paper provides a closed-form formula for pricing contingent claims with nonlinear payoff under a no-arbitrage principle when underlying assets follow the extended Cox–Ingersoll–Ross (ECIR) process with the symmetry properties of the Brownian motion. The formula proposed here is a consequence of successfully solving an explicit solution for a system of recurrence partial differential equations in which its solution subtly depends on the conditional moments. For the particular CIR process, we obtain simple closed-form formulas by solving the Riccati differential equation. Furthermore, we carry out a complete investigation of the convergent case for those formulas. In case such as that of the unsolvable Riccati differential equation, ECIR case, a numerical method for numerically evaluating the mentioned analytical formulas and numerical validations for the formulas are examined. The validity and efficiency of the formulas are numerically demonstrated by comparison with results from Monte Carlo simulations for various modeling parameters. Finally, the proposed formula is applied to the value contingent claims such as coupon bonds, interest rate swaps, and arrears swaps.

FORENSIC ACCOUNTING: THE USE OF BENFORD'S LAW TO EVALUATE INDICATIONS OF FRAUD

The sudden decline in profit at PII Corporation is an important issue that requires further discussion. This study aims to evince whether there are indications of fraud in the preparation of PII Corporation's profit and loss statements, which can be proven through Benford's Law. This study uses the Binomial Test, Sign Test, and Chi-Squared Test methods to test the alignment of data with Benford's Law. The sample in this study consists of PII Corporation's 2013-2019 profit and loss reports. The results have shown that 25 out of 28 tests expressed no indication of fraud, while 3 tests have indicated fraud, detected in the fourth digit of the company's expenses, in the first 2 digits of its expenses, and in the last 2 digits of other incomes and costs. After further investigation, it was found that the significant decrease in profit occurred because the company had paid interest on bonds with quite large values in 2019, so the statistical test results were considered false-positive. The recommendation that can be given is that PII Corporation regulates the imposition of the bond coupon value in stages.

Bonds and Options Valuation Using a Conditioning Factor Approach

This paper looks at methods to calculate prices (or approximate prices) of bonds (zero coupon as well as coupon bearing) where the interest rates follow a log-normal distribution using two different waysthe first method makes use of a conditioning variable similar to the approach of Basu (1999) and Rogers and Shi (1995), while the second method (only applicable in case of the zero - coupon bond case) is by making use of a direct expansion technique. The conditioning factor based method is then used to approximate the price of the bond (in fact the lower bound to the price of the bond) for the case of coupon carrying bonds - both non-defaultable as well as defaultable ones. Finally, the conditioning factor method is used to value European options on assets with stochastic volatility. The approach used is not one based on numerical solutions to partial differential equations but rather on an approximation to the price of the option that can be arrived at using the conditioning factor approach. As is shown in the tables at the end of the paper, the results obtained by using the conditioning factor based approach is quite accurate - in fact in some cases it is exactly equal to the true prices themselves.