Pricing Partially Guaranteed Bonds : Valuation of Bonds Benefitting from a World Bank Partial Guarantee
The absence of sovereign bond issuances with World Bank guarantee support for almost 15 years and the customized application of the WB guarantee instrument led potential investors in the Ghana bond to ponder the best way to value the instrument. Th...
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Online Access: | http://documents.worldbank.org/curated/en/2016/02/25918942/pricing-partially-guaranteed-bonds-main-report http://hdl.handle.net/10986/23758 |
| Summary: | The absence of sovereign bond issuances
with World Bank guarantee support for almost 15 years and
the customized application of the WB guarantee instrument
led potential investors in the Ghana bond to ponder the best
way to value the instrument. This paper provides guidance on
this subject by presenting four ways to assess the value of
a World Bank guarantee for debt capital market issues. The
methodologies presented are: nominal weighted average yield;
rolling nominal weighted average yield; discounted cash
flow; and recovery analysis. The paper presents the
methodologies by applying them to a fictional bond issuance
by the government of Emergistan, a fictional low income
country. Background information on the country and bond
issuance has been kept to the minimum as the sole purpose of
this example is to illustrate the results of each of the
methodologies. It should be noted that World Bank
guarantees can be structured in a number of ways depending
on the issuer’s objectives as well as country and market
circumstances. For instance, guarantees could cover interest
and/or principal payments of bonds. Coverage could be on a
first loss or back-ended basis. Therefore, the most
appropriate valuation method would depend on the specific
features of the guarantee being considered. |
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