The Brazilian Government Bond Prepared by: HWA-YOUNG CHONNY HUNG Contents Table 1. Bond overview 2. Introduction of Brazil Economies 3. Brazil goes into recession after World Cup 4. Evaluate Brazilian Government Bonds 5. The outlook of Brazilian Government Bonds in 2015 1- Bond Overview What is a bond? • is a loan that the bond purchaser, or bondholder, makes to the bond issuer. • Like a loan, a bond pays interest periodically (coupon payment) and repays the principal (Face Value) at a stated time, known as maturity. What determines the price of a bond in the open market? • A bond’s price and yield determine its value in the secondary market. What determines the price of a bond in the open market? • Example : - Suppose the fall of the real to 13%, at the same time Brazilian yield rate is 12%. What does it mean? - Investors made a loss - Real is difficult to hedge and take lots of cost so is exposed in foreign exchange loss. Government Bonds • issued by a national government when they need capital. • is denominated in the country’s own currency • Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds • Purchased by Central Government at maturity. • Examples of government bonds: - U.S. Treasuries - Japanese Government Bonds - Brazilian Government Bonds Government Bonds • The yield required by investors to loan funds to governments reflects - inflation rate expectations - the likelihood that the debt will be repaid • Example : - rapid changes in currency exchange rate : The real has collapsed and it drives Brazil economy to sharp increase in prices 2- Introduction of Brazil Economies - GDP  The GDP in Brazil was worth 2245.67 billion US dollars in 2013.  The GDP value of Brazil represents 3.62% of the world economy.  GDP in Brazil averaged 536.88 USD Billion from 1960 until 2013, reaching an all time high of 2476.69 USD Billion in 2011 and a record low of 15.17 USD Billion in 1960. Brazil GDP Annual Growth Rate Chart(1991-2015)  GDP contracted 1.60% in the first quarter of 2015 over the same quarter of the previous year.  GDP Annual Growth Rate in Brazil averaged 2.93% from 1991 until 2015.  reaching an all time high of 10.10%in 1995,record low of -3.15%in 1992. Brazil GDP Per Capita  The GDP per capita was last recorded at 5823.04 US dollars in 2013.  The GDP per Capita in Brazil is equivalent to 46% of the world's average. GDP per capita in Brazil averaged 3791.85 USD from 1960 until 2013.  reaching an all time high of 5823.04 USD in 2013 and a record low of 1726.57 USD in 1960. [...]... the first quarter of the year also showed a fall of 0.2% Brazil GDP Annual Growth Rate 4- The current risk factors associated with Brazilian Government Bonds 10Y & its implications Issuance of Brazilian global bonds reached USD40bn in 2010 Brazilian Global Bonds 10Y Government ($2.8 bn) Financial Sector ($17.2bn) Corporates ($19.8bn) Bond Yield - Decreased to 12.28 percent in May from 12.80 percent... Rate still go up at the end of 2015 5- The outlook of Brazilian Govt Bond in 2015 - Credit Rating Forecast: still at lower medium grade 5- The outlook of Brazilian Govt Bond in 2015 - GDP growth QoQ Forecast: almost no growth 5- The outlook of Brazilian Govt Bond in 2015 - GDP growth rate YoY Forecast: still negative growth (-1.6%) 5- The outlook of Brazilian Govt Bond in 2015 - Interest Rate Forecast:... All of factors above lead the Brazilian Gov’t Bond into lower & lower price day by day 5- The outlook of Brazilian Gov’t Bond in 2015 Forecast the outlook of risk factors below to evaluate the perspective of Bra Gov’t Bond to the end of 2015 - Credit Rating Risk Factor - Interest Rate Risk Factor - Inflation Rate Risk Factor - Exchange Rate Risk Factor 5- The outlook of Brazilian Govt Bond in 2015 -... - Lead to higher interest rates & lower market value for existing bonds Exchange Rate Risk Factor - The Brazilian real (R$) is the worst performing BRIC currency against the dollar this year - If the R$ become weaker, the bond price will lower Liquidity Risk Factor - Because of all of risk factors above, investors cannot sell the bonds whenever they want - The higher other risk factors, the higher... The outlook of Brazilian Gov’t Bond in 2015 Conclusion our forecast: - Credit Rating: still at lower medium grade - GDP Growth: still positive growth - Interest Rate: still high around 13% - Inflation Rate: fluctuates over 8% - Currency Value: still depreciates  From now to the end of 2015, the price of Brazilian Gov’t Bond continues going down due to the negative perspective of the Brazilian economy... experience financial problems that make it difficult or impossible to pay interest and principal in full (default) - Credit ratings seek to estimate the relative credit risk of a bond as compared with other bonds Credit Rating Risk Factor - BGB was ranked medium credit-quality investment grade (a step above junk bond) - Having ADEQUATE capacity to meet its financial commitments However, adverse economic... still depreciates  From now to the end of 2015, the price of Brazilian Gov’t Bond continues going down due to the negative perspective of the Brazilian economy  Proposed strategy investment: holding the Bonds until next year or until maturity Thank You for Your Listening . sovereign bonds • Purchased by Central Government at maturity. • Examples of government bonds: - U.S. Treasuries - Japanese Government Bonds - Brazilian Government Bonds Government Bonds • The. Brazil goes into recession after World Cup 4. Evaluate Brazilian Government Bonds 5. The outlook of Brazilian Government Bonds in 2015 1- Bond Overview What is a bond? • is a loan that the bond. implications Issuance of Brazilian global bonds reached USD40bn in 2010. Brazilian Global Bonds 10Y Government ($2.8 bn) Financial Sector ($17.2bn) Corporates ($19.8bn) Bond Yield - Decreased to 12.28