KINTO started to calculate the corporate bonds index KINBOND from July 2004. This index allows tracking the bond market dynamics as well as estimating the effectiveness of investing into bonds including the reinvestment of coupon payments.
Major characteristics of KINBOND are:
· Starting date for index calculation: July 1, 2004;
· Calculations are made on the daily basis;
· Reviews of the index basket are done at the beginning of each month;
· Initial index base is 100;
· Market prices source: PFTS (First Securities Trading System);
· Index is calculated on the basis of market bond transactions; if no market bond transactions were performed, the index is calculated according to prices estimated on the basis of the yield to maturity (yield to call or yield to put), which, in turn, are determined due to the last market transaction;
Bonds should correspond to the following requirements in order to be included in the index basket:
- Term to maturity is not less than 1 year and not more than 5 years;
- Declared bond issue volume is not less than UAH 3 million;
In addition, during the first three months of trading in the PFTS:
- Trading volume amounts to not less than UAH 100,000;
- The amount of days when market transactions were registered is not less than 3;
- Existence of bids and asks (the gap of 10 days is possible);
Bonds that correspond to the above requirements are included in the index basket (the number of bonds should be not less than 10). If there are less than 10 bonds meeting the above constraints, the index basket is filled with bonds, which do not necessarily meet all of the criteria, until the number of bonds in the basket reaches 10. First, the requirement on trading volume during the last 3 months is eliminated, than, the constraint on the number of days when market transactions were concluded is not taken into account, and so forth.
Index calculations are made according to the formula:
F – so called “joining” factor, which is the ratio of the index calculated according to the old estimation base, and the index calculated on the basis of the new estimation base;
Ci,t – payment (coupon, principal repayment, etc.) for bond i for the day t;
Ni - declared issue amount for bond i (the amount of bonds issued);
Pi,t - price of the bond i for the day t, which, in case of market transactions absence, is calculated according to the formula:
Cj - payment (coupon, principal repayment, etc.);
dj - the number of days between the day t and payment j;
yi - yield to maturity for bond i, which is calculated according to the formula:
Pi,k - the price of the last market transaction for bond i;
Ck - payment (coupon, principal repayment, etc.);
dk - the number of days from the last market transaction date to the payment k;
Because the solution for the last formula relative to yi could not be found through the merely mathematical procedure, the approximation method should be applied.
Thus, yield to maturity for bond i is calculated on the day when the market transaction was performed and stays unchanged until the last market transaction. The price for the bond i is calculated on the daily basis (if there were no transactions) based on the yield to maturity estimated on the day of the market transaction.
Evaluation of the asset management companies’ performance and the job they do on investment funds management is getting more urgent at the present time of the Ukrainian collective investment vehicles expansion and non-government (private) pension funds system development. KINBOND could be applied as a benchmark for both corporate bonds fund managers and investors, planning to allocate their assets in investment funds. The major characteristic of the suggested index is that it depicts the conditional value of the index portfolio with all payments (coupon, amortization, etc.) being reinvested at the same index portfolio.
The target group for using KINBOND is portfolio investors having the long-term commitment and adheres to the “buy and hold” strategy.
© Kinto, Investment & Securities in Ukraine
25-B Sagaydachnogo str, 3rd floor,
Kyiv, Ukraine 04070
Tel.: +380 (44) 462-5377, 462-5140