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Capital Markets Notes n. 1 - January 2002

INVESTMENT GRADE FINANCIAL CORPORATE BONDS: TERM STRUCTURE ESTIMATION AND

RELATIVE VALUE

Enrico Bernini – Dean Fantazzini

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INTRODUCTION

The corporate bond market in the euro area is constantly increasing as a proportion of the international debt market. The main industry represented in the corporate debt market is still financial services with a net issued amount of almost EUR 140bln in 2001.1

Apart from the increasing number of financial bonds issued by many institutions – like other non financial firms – the development in the liquidity of these securities as actively traded bonds in secondary markets is also remarkable.

Because of this, the issue of pricing has become relevant for traded corporate debt. For this purpose it is essential to be able to calculate a fair value that can be compared to the spot market price of a corporate bond. That is, to be able to calculate a fair curve that can be compared to the spot market prices of a set of corporate bonds of the same credit class but with different times to maturity

The aim of this paper is twofold. On one hand we estimate a fair credit spread curve for every investment grade class of financial corporate bonds listed in the euro area. On the other hand we provide a relative value framework: a rich-cheap analysis tool that allows us to discern if a listed corporate bond presents a premium instead of a discount or a fair price.

In addition, we are interested in assessing the critical factors an analyst has to consider in order to read, interpret and correctly evaluate the results of this model.

The paper is composed as follows. In section 2 we shall discuss the estimation methodology we apply to obtain corporate spread fair curves. In section 3 we present the relative values of corporate bonds for every investment grade class in the euro area. Section 4 states the conclusions we have reached.

THE ESTIMATION OF TERM STRUCTURES

The term structure estimation is the starting point of what is often called rich-cheap analysis namely the relative valuation of an asset with respect to a comparable fair value.

The object of the term structure estimation is to establish the discount factor function, which provides a reliable zero-coupon rate for any given maturity of a bond. We shall consider several term structures, one for each investment grade corporate rating class, plus the government curve. The last one provides a basis to which the corporate rates are compared.2

The German government bond (i.e. Bund) are assumed to be the risk-free rate securities

1 Source: IntesaBci elaborations on CapitalData Bondware data. 2 On this point it is important to state how much delicate is this necessary assumpion. Referring to a government curve we ask for a

credit spread “no biasing” condition. Most of benchmarks in the government bond market are rich. The direct effect would be to produce higher corporate spread levels, ceteris paribus. As a consequence we select government bonds that may be either benchmark for their maturity or not, in order to obtain a reliable curve for our corporate spread evalutation purposes.

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for the whole euro area financial market. The zero curve for these securities is estimated by third order basis spline functions (i.e. 3rd Order B-splines).

The sample

The selection criteria

In order to be representative as a sample, it is a strict requirement that the issues under consideration are liquid. Considering that not all of them are listed on a debt market in Europe it is essential to define a selection criterium to identify the most liquid corporate bonds. For each credit class the bonds are selected according to the following set of criteria:

i) age: namely, how much time has passed from the date of issue;

ii) bid-ask spread: the higher the uncertainty on its fair price, the higher its bid-ask spread;

iii) amount issued: the greater the issued debt amount on the primary market, the greater should be its active trading on the secondary market, whatever that market is (i.e. over-the-counter or a listed stock exchange). This therefore acts as a reasonable and effective proxy of its liquidity.

In particular:

• the term to maturity is never less than a year and the age is never less than three years;

• no bid-ask spread constraints are applied to the selection;

• 500bln euro is the minimum amount required for Standard&Poor’s AAA and AA credit ratings, while a reduced size of 100bln euro for A and BBB. This is in order to collect a sufficient and effective number of issues for each credit class. For the last two classes an exception is made: these samples also consider European bonds issued in euros in Great Britain.3

These filter conditions together eliminate most of the illiquid issues on the euro area financial corporate bond market, as an effective requirement to obtain a robust and significant estimation for every credit spread curve we obtain.

The sample definition

The whole investment grade bond sample is composed of the four main traditional rating classes on issues, reported here per credit class referring to their Standard&Poor’s Credit Ratings.4

3 E.g. Imperial Tobacco Finance, UK domicile. 4 S&P Rating Services and Moody’s Investors Service: AAA-Aaa, AA-Aa, A-A and BBB-Baa.

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When an S&P rating was not available on any considered issues the Moody’s Investor’s Service ratings have been used to allocate the bond into its homogeneous credit class.

In order to raise a sufficient number of corporate bonds for each class, single credit sub-classes are considered together. This allows us to obtain a consistent and reliable estimation of the zero curve and relative value results.5

The bonds considered in the analysis belong to the Banking or Financial Services sectors, as classified by Reuters3000 Fixed Income. Our other sources of data were Bloomberg Corporate6, JPMorgan Bond Indices and Merrill Lynch EMU Financial Index. Every bond in our sample is listed by Reuters Composite, which has provided listing and homogeneity of data for all the securities considered. A complete list of the collected securities is in Appendix 1 – The Sample Securities.7

The sample of bonds for each credit class also includes four Euribor contracts with maturities of 1, 3, 6 and 12 months in order to provide regularity to the zero curve we obtain in the time-to-maturity domain. This is due to the low liquidity level of corporate bonds with time-to-maturity of less than one year.8 The presence of these securities allows us to greatly improve the robustness and signficance of estimated spline coefficients, reducing their statistical standard errors.

The 55 AAA corporate bonds collected in the sample span a time period of over twelve years, from Osterreicheische Postparka 5 1/4 % coupon with maturity at 11 November 2002 to BNG 4 1/2 % coupon, with maturity at 10 March 2014.

The 30 AA corporate bonds collected in the sample also span a time period of over twelve years, from Bayerische Hypo 5 7/8 % coupon with maturity at 10 October 2002 to Generali Finance 4 3/4 % 12 May 2014.

The 41 A corporate bonds collected in the sample cover a period of over fourteen years, from Reiffeiesen Zentralbank 4 7/8 % 27 March 2003 to Fortis Lux Finance 6 3/8 % coupon, with maturity at 16 February 2016.

The 33 BBB corporate bonds collected in the sample cover a time period of almost ten years, from Credit Lyonnais 8 3/4 % 6 November 2002 to BCP Finance Bank Ltd 6 1/4 % 29 March 2011. This investment grade class has a shorter time-to-maturity due to the increased credit risk associated with these issues. As a result of this it has been difficult to find bonds in this credit class with a longer maturity.

5 As a consequence, the ten individual sub-classes are not analysed in this work. But with the growing of the corporate bond market in

the euro area, specific term structure estimation will early become a reality and interesting results are already available by the authors. 6 On Bloomberg: MER Go, then Corporate Go to start with. 7 Other kinds of data such as Liquidation Status and Redemption, relevant in rich-cheap analysis have been collected for further

analysis. A part from sub-class splitting, other researches have to be addressed towords other features of corporate and financial bonds such as Liquidation Status and Redemption, on which a fair price might be conditional to.

8 Such illiquidity would produce a strong short term swing in the curve. For details on this point, cf. Bernini E. and Fantazzini D., 2001, “Stima di Strutture a Termine: il Caso dei Corporate Spread Finanziari”, Collana Ricerche 01/01 – IntesaBci, September (p.39-40).

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The data presented in this paper were last updated on 30 November 2001.

Estimation of zero curves

Since the credit spread curves usually present a more regular shape in relation to the bond yield-to-maturity curve, we have reduced the order of the used splines by a lower grade of their degree of freedom. As a result, a quadratic spline (rather than a cubic one) has been chosen to estimate the spread zero curve. As quadratic spline functions require fewer nodes this has improved the estimation.9

The advantage of this approach is that it has reduced the root mean squared errors, i.e. a better estimation of the sample data.

The estimated zero curve functions we obtain are regular and they are showed in figure 1.

Figure 1 – SPREAD ZERO CURVES

Investment Grade Financial Corporate Spreads: AAA - AA - A - BBB Ratings

0102030405060708090

100110120130140150160170180190200210220230240250

mag-02

ago-0

2

nov-0

2feb

-03

mag-03

ago-0

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nov-0

3feb

-04

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nov-0

4feb

-05

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-06

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nov-0

6feb

-07

mag-07

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7feb

-08

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8feb

-09

mag-09

ago-0

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nov-0

9

Maturity

Spre

ad

BBB

A

AA

AAA

On the base of these curves every single rating class has been estimated in prices and

yield-to-maturity. The root mean squared error (RMSE) between theoretical and market yield-to-maturity is a measure that gauges the ability of the proposed model to accomodate any single sample of data. The same measure of dispersion has been considered with regard to prices.

Table 1 summarises the root mean squared error we obtained for each credit class, confirming (as expected) monotony in its values: the higher the credit stance, the lower the

9 Cf. Bernini E. and Fantazzini D., 2001, Op.Cit.

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dispersion of data (and consequently the RMSE).

Table 1 – ROOT MEAN SQUARED ERRORS (IN BASIS POINTS)

ROOT MEAN SQUARED ERROR

0,005,00

10,0015,0020,0025,0030,0035,0040,0045,00

AAA AA A BBB

RELATIVE VALUE ANALYSIS

The curve estimation of the zero-coupon rates allows to calculate the so-called fair price of a security, enabling a rich-cheap analysis: if the market price is higher than the fair price then the security is rich, otherwise it is cheap.

Similarly, we define the fair yield-to-maturity as that corresponding to the fair price for a given maturity. A corporate bond is rich if its yield to maturity is lower than the fair yield-to-maturity, and cheap otherwise.

The corporate premium or discount is defined by the difference

π = [(ytm fair) – (ytm real)]

where,

ytm fair = yield to maturity correspondent to the estimated fair price

ytm real = yield to maturity that corresponds to the real market price

such that:

if π is positive (i.e. ytm fair > ytm real) the corporate is rich because of its lower yield to maturity with respect to its fair one. This corresponds to the simple fact that the corporate bond price is higher than the estimated fair price. Similarly, if π is negative (i.e. ytm fair < ytm real) the corporate is cheap on the basis of the same reasoning.

This convention allows us to recognise positive premia and negative discount factors π, and therefore whether a considered security is rich or cheap.

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Figure 3 – YIELD TO MATURITY CURVE – CORPORATE FINANCIAL AAA

Curva dei rendimenti a scadenza - Titoli AAA

3,00%

3,50%

4,00%

4,50%

5,00%

5,50%

6,00%

6,50%

7,00%

OESTERREICHISCHE POSTSPARKA.

DSL FIN

ANCE

HYPOTHENKEN IN ESSEN

DEXIA M

UNICIPAL A

GENCY

RABOBANK NEDERLA

ND

RABOBANK NEDERLA

ND

DEXIA M

UNICIPAL A

GENGY

BAYERISCHE LA

NDESBANK

ALLGEMEIN

E HYPO

BNG

DEUTSCHE POST BANK

DEUTSCHE POST BANK

OESTERREICHISCHE KONTROLL

B.

WESTDEUTSCHE LA

NDESBANK

DEUTSCHE GENOSSENSCHAFTS-H

YPO

WUERTTEMBERGISCGE H

YPO

BFG HYPOTHEKENBANK

MUENCHENER HYPO

LANDW

IRTSCHAFTLIC

HE R.BANK

DEUTSCHE GENOSSENSCHAFTS-H

YPO

LANDESBANK BADEN-W

UERTTEMBERG

WESTFAELIS

CHE LANDSCHAFT-B

OD.

NEDERLANDSE W

ATERSCHAPSBANK NV

CRH

DEUTSCHE HYPO

DEPFA DEUTSCHE PFANDBRIEF.

BNGBNG

Figure 4 – YIELD TO MATURITY CURVE – CORPORATE FINANCIAL AA Curva dei rendimenti a scadenza - Titoli A

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

RAIFFEISEN ZENTRALBANK

DRESDNER BANK

FORTIS FIN

ANCE NV

BAYERISCHE H

YPO UND V

EREINSB.

LINDE FIN

ANCE

SNS BANK N

EDERLAND

BAYERISCHE H

YPO UND V

EREINSB.

FORTIS FIN

ANCE NV

UNIBAIL

UNIBAIL

INTERNATIO

NAL ENDESA

NUERNBERGER HYPO

SOCIETE G

ENERALE

LINDE FIN

ANCE

ING B

ANK

SNS BANK N

EDERLAND

NUERNBERGER HYPO

CCCI

ROYAL BANK O

F SCOTLA

ND

BNP PARIB

AS

ALLGEMEIN

E HYPO

ING B

ANK

FORTIS FIN

ANCE NV

BSCH ISSUANCE

BAYERISCHE H

YPO UND V

EREINSB.

BANK OF IR

ELAND

CCCI

BSCH ISSUANCE

COMMERZBANK

UNICREDITO IT

ALIANO

CCCI

NATWEST B

ANKCCCI

BNP PARIB

AS

SOCIETE G

ENERALE

SOCIETE G

ENERALE

FORTIS LU

X FINANCE

Corporate spread dynamics

The corporate spread dynamics over time matter in valuation.

Benchmark corporate bonds are usually rich in price, due to their liquidity premium. Market prices tend to be higher than their fair prices over time: their difference is almost always positive and it tends to fluctuate around a positive constant delta defined as the average of

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these differences over a period in time.

New issued corporate bonds tend to be rich when they are issued, because of their large tradable outstanding, becoming cheap after varying periods of time.

These and other features, such as liquidation status and redemption for example, constitute relevant variables to be considered in relative value analysis. This is the analysis that we suggest could be adopted by traders and practitioners in this field.

CONCLUSIONS

In this paper we have estimated the term structure of government, corporate and credit spreads and explained how it is possibile to define relative values for euro investment grade financial corporate bonds, with respect to the relevant yield curve.

For this purpose two factors were important: the yield curve estimation methodology we have employed and the sample we have defined for this purpose.

On one hand we considered the B-spline methodology to achieve reliable term structures, i.e. likelihood, smooth and regular curves. On the other hand we have defined five distinct and independent sets of data as the bond sample dataset: one for government debt and one for each investment grade credit rating class.

With respect to the considered methodology, the introduction of a multi-curve model, based on the joint estimation of term structures, has allowed us to make a parsimonious estimation of the curves due to a larger set of available data (as opposed to a single-curve estimation alternative).

Regarding the whole sample of data we built an updated dataset composed of the four main investment grade corporate bonds plus a euro area government bond set. This was because of their liquidity and because they are commonly used for credit spread estimation.

Robust and stable results on curve estimations were achieved for every single investment grade class in this work. The estimation of zero-coupon rate curves has allowed us to evaluate the corporate bond fair prices, making rich-cheap analysis feasibile. For every rating class curve it was possible to evaluate the relative price of a bond with respect to its fair curve, and also to define a global dispersion property of a set of bonds with the same credit rating. This means that a credit spread curve provides an ideal model that can effectively explain collective bond prices’ dynamic behaviour over time.

Features like liquidation status, redemption, debt seniority and prices’ dynamic behaviour, constitute new relevant variables to be considered in further relative value researches.

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APPENDICES

Appendix 1 : The sample securities

Table 1 – FINANCIAL CORPORATE BONDS: AAA CREDIT RATING CLASS REUTERS RIC TITOLO MATURITY CEDOLA

OGGI EURIBOR AAA 1 MESI EURIBOR AAA 3 MESI EURIBOR AAA 6 MESI EURIBOR AAA 12 MESI

AT008159777= OESTERREICHISCHE POSTSPARKA. 11-nov-02 5,25DE007268424= DSL FINANCE 05-dic-02 5,125DE008394075= DSL FINANCE 04-feb-03 4,5NL008616736= RABOBANK NEDERLAND 05-mag-03 4,5DE257463= HYPOTHENKENBANK IN ESSEN 16-lug-03 4,5DE243351= DSL BANK 17-giu-04 3,5FR048638= DEXIA MUNICIPAL AGENGY 21-giu-04 4,5DE215826= MUENCHENER HYPO 01-lug-04 5NL009569006= RABOBANK NEDERLAND 12-lug-04 3,625DE343814= WUERTTEMBERGISCGE HYPO 16-ago-04 4,25NL010251435= RABOBANK NEDERLAND 13-ott-04 4,75DE226453= DEXIA HYPOTHEKENBANK AG 24-gen-05 4,75FR049742= DEXIA MUNICIPAL AGENGY 26-apr-05 5AT005909651= OESTERREICHISCHE KONTROLLB. 08-ago-05 7DE012285787= BAYERISCHE LANDESBANK 19-gen-06 4,875DE335656= NUERNBERGER HYPO 23-gen-06 6DE202783= ALLGEMEINE HYPO 01-feb-06 5,25AT006347983= OESTERREICHISCHE KONTROLLB. 21-feb-06 6,375NL012512449= BNG 28-feb-06 4,75DE251560= BAYERISCHE HYPO UND VEREINS 01-mar-06 4,75DE009614273= DSL BANK 20-apr-06 3,875FR049979= DEXIA MUNICIPAL AGENGY 26-apr-07 5,375DE007901330= DSL BANK 13-ago-07 5,625DE253803= DEUTSCHE HYPO 06-set-07 5AT008007594= OESTERREICHISCHE KONTROLLB. 12-set-07 5,75DE222008= BAYERISCHE HYPO UND VEREINS 15-gen-08 5,5DE307505= WESTDEUTSCHE LANDESBANK 08-feb-08 5,25AT008371822= OESTERREICHISCHE KONTROLLB. 25-apr-08 5,25DE232115= DEUTSCHE GENOSSENSCHAFTS-HYPO 19-giu-08 4,75DE276476= KREDITANSTALT FUER WIEDERAUFBAU 01-set-08 5,625DE343738= WUERTTEMBERGISCGE HYPO 02-ott-08 4,25FR048564= COMPAGNIE DE FINANCEMENT FONCIER 25-ott-08 5,125DE308150= BFG HYPOTHEKENBANK 06-nov-08 5DE276078= KREDITANSTALT FUER WIEDERAUFBAU 04-gen-09 5DE101552= MUENCHENER HYPO 15-gen-09 5DE309083= LANDWIRTSCHAFTLICHE R.BANK 23-mar-09 5DE009695729= LANDWIRTSCHAFTLICHE R.BANK 30-apr-09 4,125DE350904= DEUTSCHE GENOSSENSCHAFTS-HYPO 13-ago-09 5,25DE236652= DEUTSCHE GENOSSENSCHAFTS-HYPO 01-apr-10 5,5FR018656= CRH 25-apr-10 5,75DE102381= LANDESBANK BADEN-WUERTTEMBERG 06-lug-10 5,5DE276080= KREDITANSTALT FUER WIEDERAUFBAU 11-ago-10 4,75DE340216= WESTFAELISCHE LANDSCHAFT-BOD. 13-ott-10 5,25NL011024513= BNG 25-ott-10 5,625NL012752440= NEDERLANDSE WATERSCHAPSBANK NV 19-apr-11 5,125DE215860= MUENCHENER HYPO 19-apr-11 4,25FR018624= CAISSE DE REFINANCEMENT HYPO. 25-apr-11 4,2NL012319843= BNG 04-lug-11 5,25DE253795= DEUTSCHE HYPO 14-feb-12 6DE315955= RHEINBODEN HYPOTHEKENBANK 24-ago-12 5DE247536= DEPFA DEUTSCHE PFANDBRIEF. 15-gen-13 5,5FR048572= COMPAGNIE DE FINANCEMENT FONCIER 02-mar-13 5,375NL008742685= BNG 05-giu-13 5,375DE276079= KREDITANSTALT FUER WIEDERAUFBAU 17-giu-13 5,125NL009515119= BNG 10-mar-14 4,5

Table 2 – FINANCIAL CORPORATE BONDS: AA CREDIT RATING CLASS

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REUTERS RIC TITOLO MATURITY CEDOLA OGGI EURIBOR AA 1 MESI EURIBOR AA 3 MESI EURIBOR AA 6 MESI EURIBOR AA 12 MESI

DE006948782= BAYERISCHE HYPO 10-ott-02 5,875 FR004580095= BNP 29-set-03 6,5 DE008159351= BAYERISCHE HYPO 20-nov-03 5,375 AT009658815= BANK AUSTRIA 23-apr-04 3,5 DE009682279= DEUTSCHE FINANCE (NETHERL.) 28-apr-04 3,5 DE008720223= DEUTSCHE FINANCE (NETHERL.) 19-mag-05 5 DE008745544= DRESDNER FINANCE BV 25-mag-05 5 NL012840152= ING GROEP NV 03-mag-06 5 DE009382038= DRESDNER FINANCE BV 19-gen-07 4 NL011461492= ING GROEP NV 01-ago-07 6 DE259986= DEUTSCHE HYPOTHEKENBANK 21-set-07 5,25 FR012358563= CAISSE NATIONAL DES CAISSES… 31-gen-08 5,25 DE012798431= RWE FINANCE 18-apr-08 5,375 FR008416095= CREDIT LOCAL DE FRANCE 25-apr-08 5,25 DE008718431= DRESDNER FINANCE BV 04-gen-09 5,25 DE008664501= DEUTSCHE FINANCE (NETHERL.) 04-gen-09 5 NL009400192= ING BANK 29-gen-09 4,25 FR009038914= CREDIT LOCAL DE FRANCE 25-apr-09 4,75 IT009759620= INA 28-mag-09 4,5 NL009874518= ABN AMRO BANK 24-giu-09 4,75 DE009382119= DEUTSCHE FINANCE (NETHERL.) 28-lug-09 4,25 DE011219314= DEUTSCHE BAHN FINANCE 15-giu-10 6 DE012704984= WESTDEUTSCHE LANDESBANK 04-apr-11 5,25 NL012875878= ABN AMRO BANK 16-mag-11 5,625 DE012926430= DEUTSCHE FINANCE (NETHERL.) 18-mag-11 5,5 DE273822= DGZ-DEKABANK 06-giu-11 5,5 FR007907010= CREDIT LOCAL DE FRANCE 20-ago-12 5,75 DE009360018= DEUTSCHE FINANCE (NETHERL.) 20-ago-13 5,125 DE229459= DEPFA DEUTSCHE PFANDBR. 15-gen-14 4,5 IT009724524= GENERALI FINANCE 12-mag-14 4,75

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Table 3 – FINANCIAL CORPORATE BONDS: A CREDIT RATING CLASS REUTERS RIC TITOLO MATURITY CEDOLA

EURIBOR A 1 MESI EURIBOR A 3 MESI EURIBOR A 6 MESI EURIBOR A 12 MESI

AT007416199= RAIFFEISEN ZENTRALBANK 27-mar-03 4,875 DE004287495= DRESDNER BANK 01-apr-03 6,75 NL011797091= FORTIS FINANCE NV 17-ott-03 5,75 DE010676304= BAYERISCHE HYPO UND VEREINSB. 02-feb-04 5,25 DE012490305= LINDE FINANCE 27-feb-04 4,875 NL010167230= SNS BANK NEDERLAND 21-set-04 4,75 DE011381871= BAYERISCHE HYPO UND VEREINSB. 12-lug-05 5,5 NL011644970= FORTIS FINANCE NV 19-set-05 5,75 FR012356188= UNIBAIL 30-gen-06 5,625 FR009844708= UNIBAIL 15-giu-06 4,375 ES010360943= INTERNATIONAL ENDESA 08-nov-06 5,75 DE335694= NUERNBERGER HYPO 23-gen-07 5 FR007396376= SOCIETE GENERALE 12-mar-07 6 DE011247636= LINDE FINANCE 14-giu-07 6,375 NL008052000= ING BANK 01-ott-07 6 NL008091765= SNS BANK NEDERLAND 15-ott-07 5,875 DE335667= NUERNBERGER HYPO 11-feb-08 5,25 FR008395713= CCCI 25-apr-08 5,25 GB008905487= ROYAL BANK OF SCOTLAND 22-lug-08 5,25 FR008930546= BNP PARIBAS 07-ago-08 5,625 DE202931= ALLGEMEINE HYPO 15-set-08 5,75 NL009470743= ING BANK 23-feb-09 4,625 NL009632492= FORTIS FINANCE NV 07-apr-09 4,625 ES009894420= BSCH ISSUANCE 06-lug-09 5,125 DE010174228= BAYERISCHE HYPO UND VEREINSB. 15-gen-10 5,625 IE010751519= BANK OF IRELAND 10-feb-10 6,45 FR010741521= CCCI 26-apr-10 6,25 ES010857678= BSCH ISSUANCE 05-lug-10 6,375 DE011386385= COMMERZBANK 12-lug-10 6,5 IT012615728= UNICREDITO ITALIANO 16-mar-11 6 FR009683330= CCCI 25-apr-11 4,5 GB009902635= NATWEST BANK 30-giu-11 5,125 FR010950538= CCCI 16-ott-12 6,125 FR018709=PA BNP PARIBAS 30-ott-12 5,8 FR018712=PA SOCIETE GENERALE 05-nov-12 5,65 FR011067395= SOCIETE GENERALE 27-apr-15 6,625 NL012272073= FORTIS LUX FINANCE 16-feb-16 6,375

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Table 4 – FINANCIAL CORPORATE BONDS: BBB CREDIT RATING CLASS REUTERS RIC TITOLO MATURITY CEDOLA

EURIBOR BBB 1 MESI

EURIBOR BBB 3 MESI

EURIBOR BBB 6 MESI

EURIBOR BBB 12 MESI

FR004012038= CREDIT LYONNAIS 06-nov-02 8.75

FR004174518= BANQUE WORMS SA 24-feb-03 7.75

IT011859097= FIAT FINANCE AND TRADE LTD 17-ott-03 5.75 IT011162240= PARMALAT FINANCE CORP BV 08-dic-03 6 IT109327=MI BANCA NAZIONALE DEL LAVORO 15-mar-04 7.35

GB012579250= IMPERIAL TOBACCO FINANCE 15-mar-04 5.375

IT009592750= FIAT FINANCE AND TRADE LTD 31-mar-04 3.75

IT009854916= PARMALAT FINANCE CORP BV 23-giu-04 4.625

CH013238405= METRO FINANCE BV 12-lug-04 5

PL010335027= TPSA EUROFINANCE BV 27-ott-04 6.125

FR004577230= CREDIT LYONNAIS 16-set-04 6.75

IT010658357= PARMALAT FINANCE CORP BV 07-feb-05 6.25

DE011478727= METALLGESELLSCHAFT FINANCE BV 25-lug-05 6.75

IT011494579= FIAT FINANCE AND TRADE LTD 01-ago-05 6.125

GB009299017= ALLIED DOMECQ FINANCIAL SERVICES 14-dic-05 4.75

IT012332106= PARMALAT FINANCE CORP BV 06-feb-06 6

ES012447914= SOL MELIA EUROPE BV 09-feb-06 6.25

PL012521952= TPSA EUROFINANCE BV 01-mar-06 6.625

CH012549482= METRO FINANCE BV 09-mar-06 5.75

GB012785232= ALLIED DOMECQ FINANCIAL SERVICES 18-apr-06 5.5

IT012964820= FIAT FINANCE AND TRADE LTD 25-mag-06 5.75

GB010215439= IMPERIAL TOBACCO FINANCE 27-set-06 6.375

IT010538335= FIAT FINANCE AND TRADE LTD 13-dic-06 5.5

DE010780136= HEIDELBERGER ZEMENT FINANCE BV 22-feb-07 6.375

PL010872413= TPSA EUROFINANCE BV 13-mar-07 6.5

IT011865968= PARMALAT FINANCE CORP BV 23-ott-07 7

IT013259917= PARMALAT FINANCE CORP BV 25-lug-08 6.8

IT009563962= PARMALAT FINANCE CORP BV 30-mar-09 5.5

DE009614117= HEIDELBERGER ZEMENT FINANCE BV 09-apr-09 4.75

IT010752540= FIAT FINANCE AND TRADE LTD 24-feb-10 6.25

PT012701179= BCP FINANCE BANK LTD 29-mar-11 6.25

IntesaBci 12

Table 5 – GOVERNMENT BOND: BUND

REUTERS RIC TITOLO MATURITY CEDOLA OGGI EURIBOR GOVT 1 MESI EURIBOR GOVT 3 MESI EURIBOR GOVT 6 MESI EURIBOR GOVT 12 MESI

114122 BUND OBL 22-feb-02 4,5 114123 BUND OBL 17-mag-02 4,5 113690 BUND SCHATZ 14-giu-02 5 113486 BUND BRD 22-lug-02 8 114124 BUND OBL 19-ago-02 4,5 113691 BUND SCHATZ 13-set-02 5 109000 BUND TREUHAND 01-ott-02 7,75 113487 BUND BRD 21-ott-02 7,25 114125 BUND OBL 12-nov-02 5 109001 BUND TREUHAND 02-dic-02 7,375 113692 BUND SCHATZ 13-dic-02 4,75 113488 BUND BRD 20-dic-02 7,125 109002 BUND TREUHAND 29-gen-03 7,125 114126 BUND OBL 18-feb-03 4,5 113489 BUND BRD 22-apr-03 6,75 109003 BUND TREUHAND 23-apr-03 6,5 114127 BUND OBL 19-mag-03 4,5 109004 BUND TREUHAND 11-giu-03 6,875 113694 BUND SCHATZ 13-giu-03 4,25 109005 BUND TREUHAND 09-lug-03 6,625 113490 BUND BRD 15-lug-03 6,5 114128 BUND OBL 26-ago-03 3,75 113695 BUND SCHATZ 12-set-03 3,75 113491 BUND BRD 15-set-03 6 114129 BUND OBL 11-nov-03 3,5 109006 BUND TREUHAND 12-nov-03 6 114130 BUND OBL 17-feb-04 3,25 109007 BUND TREUHAND 04-mar-04 6,25 109008 TREUHAND 13-mag-04 6,75 113493 BUND BRD 15-lug-04 6,75 109009 TREUHAND 09-set-04 7,5 113495 BUND BRD 11-nov-04 7,5 113496 BUND BRD 03-gen-05 7,375 113497 BUND BRD 12-mag-05 6,875 113498 BUND BRD 14-ott-05 6,5 113499 BUND BRD 05-gen-06 6 113500 BUND BRD 16-feb-06 6 114137 BUND OBL 17-feb-06 5 113501 BUND BRD 26-apr-06 6,25 114138 BUND OBL 18-ago-06 4,5 113502 BUND BRD 04-gen-07 6 113503 BUND BRD 04-lug-07 6 113505 BUND BRD 04-gen-08 5,25 113507 BUND BRD 04-lug-08 4,75 113509 BUND 04-lug-08 4,125 113510 BUND BRD 04-gen-09 3,75 113511 BUND BRD 04-lug-09 4 113512 BUND BRD 04-lug-09 4,5 113513 BUND BRD 04-gen-10 5,375 113515 BUND BRD 04-lug-10 5,25 113516 BUND BRD 04-gen-11 5,25 113518 BUND BRD 04-lug-11 5 113446 BUND BRD 20-giu-16 6 113492 BUND BRD 04-gen-24 6,25 113504 BUND BRD 04-lug-27 6,5 113506 BUND BRD 04-gen-28 5,625 113508 BUND BRD 04-lug-28 4,75 113514 BUND BRD 04-gen-30 6,25 113517 BUND BRD 04-gen-31 5,5

IntesaBci 13

Appendix 2 : Rich-Cheap Analysis Values

Figure 5 – Rich Aaa

Rich AAA Financial Corporate Bonds (Real vs Fair YTM)

-2,00

0,00

2,00

4,00

6,00

8,00

10,00

12,00

14,00

16,00

LANDW

IRTSCHAFTLIC

HE R.B

ANK 30/04

/09

HYPOTHENKEN IN E

SSEN 16/07

/03

KREDITANSTALT FUER W

IEDERAUFBAU 17

/06/13

DEUTSCHE HYPO 06

/09/07

DEXIA M

UNICIP

AL AGENGY 26

/04/05

BFG HYPOTHEKENBANK 06

/11/08

LANDW

IRTSCHAFTLIC

HE R.B

ANK 23/03

/09

OESTERREICHIS

CHE KONTROLL

B. 12/0

9/07

LANDESBANK B

ADEN-WUERTTEMBERG 06

/07/10

WESTFAELIS

CHE LANDSCHAFT-B

OD. 13/1

0/10

OESTERREICHIS

CHE KONTROLL

B. 25/0

4/08

DEUTSCHE POST BANK 17

/06/04

COMPAGNIE D

E FINANCEMENT FONCIE

R 02/03

/13

DEUTSCHE HYPO 14

/02/12

DEPFA DEUTSCHE P

FANDBRIEF. 15/0

1/13

BNG 28/02

/06

MUENCHENER HYPO 19

/04/11


IEDERAUFBAU 01

/09/08

RABOBANK NEDERLA

ND 13/10

/04

NEDERLANDSE W

ATERSCHAPSBANK NV 19

/04/11

DEUTSCHE POST BANK 20

/04/06

BAYERISCHE LA

NDESBANK 19/01

/06

BNG 25/10

/10


IEDERAUFBAU 04

/01/09

BNG 04/07

/11

RABOBANK NEDERLA

ND 12/07

/04


IEDERAUFBAU 11

/08/10

Figure 6 – CHEAP AAA

Cheap AAA Financial Corporate Bonds (Real vs Fair Spreads)

-60,00

-50,00

-40,00

-30,00

-20,00

-10,00

0,00

CRH 25/04

/11

BNG 10/03

/14

BNG 05/06

/13

RABOBANK NEDERLA

ND 05/05

/03

DEUTSCHE G

ENOSSENSCHAFTS-H

YPO 01/04

/10

DEUTSCHE GENOSSENSCHAFTS

-HYPO 13

/08/09

DEUTSCHE P

OST BANK 13

/08/07

MUENCHENER HYPO 15

/01/09

BAYERISCHE H

YPO UND V

EREINS 01

/03/06

ALLGEMEIN

E HYPO 01

/02/06

BAYERISCHE H

YPO UND V

EREINS 15

/01/08

NUERNBERGER HYPO 23

/01/06

OESTERREIC

HISCHE K

ONTROLL

B. 21/0

2/06

OESTERREICHIS

CHE KONTROLL

B. 08/0

8/05

DEUTSCHE G

ENOSSENSCHAFTS-H

YPO 19/06

/08

DSL FIN

ANCE 04/02

/03

DEXIA H

YPOTHEKENBANK A

G 24/01

/05

WUERTT

EMBERGISCGE H

YPO 02/10

/08

DEXIA M

UNICIP

AL AGENCY 21

/06/04

MUENCHENER HYPO 01

/07/04

DSL FIN

ANCE 05/12

/02

WUERTTE

MBERGISCGE H

YPO 16/08

/04

DEXIA M

UNICIP

AL AGENGY 26

/04/07

WESTD

EUTSCHE LA

NDESBANK 08/02

/08

RHEINBODEN H

YPOTHEKENBANK 24

/08/12

OESTERREICHIS

CHE POSTS

PARKA. 11/1

1/02

CRH 25/04

/10

COMPAGNIE D

E FINANCEMENT F

ONCIER 25

/10/08

IntesaBci 14

Figure 7 – RICH AA

Rich AA Financial Corporate Bonds (Real vs Fair YTM)

0,00

5,00

10,00

15,00

20,00

25,00

30,00

DEUTSCHE FINANCE (N

ETHERL.) 28

/07/09

CREDIT LOCAL D

E FRANCE 25/04

/09

DRESDNER FINANCE B

V 25/05

/05

ING G

ROEP NV 01

/08/07

DEUTSCHE FINANCE (N

ETHERL.) 18

/05/11

ING G

ROEP NV 03

/05/06

DRESDNER FINANCE B

V 19/01

/07

BNP 29/09

/03

DEUTSCHE FINANCE (N

ETHERL.) 19

/05/05

BAYERISCHE H

YPO 20/11

/03

BANK AUSTRIA

(*) 2

3/04/0

4

CREDIT LOCAL D

E FRANCE 20/08

/12

WESTDEUTSCHE LA

NDESBANK 04/04

/11

CREDIT LOCAL D

E FRANCE 25/04

/08

DEUTSCHE HYPOTHEKENBANK 21

/09/07

DGZ-DEKABANK 06

/06/11

DEPFA DEUTSCHE P

FANDBR. 15/0

1/14

FIGURE 8 – CHEAP AA

Cheap AA Financial Corporate Bonds (Real vs Fair YTM)

-35

-30

-25

-20

-15

-10

-5

0INA 28/05/09

RWE FINANCE18/04/08

GENERALIFINANCE12/05/14

DEUTSCHEFINANCE

(NETHERL.)20/08/13

BAYERISCHEHYPO 10/10/02

SpecialABN AMRO

BANK 24/06/09

DEUTSCHEBAHN

FINANCE15/06/10

DRESDNERFINANCE BV

04/01/09

CAISSENATIONAL

DESCAISSES…

31/01/08

DEUTSCHEFINANCE

(NETHERL.)04/01/09

ING BANK29/01/09

ABN AMROBANK 16/05/11

DEUTSCHEFINANCE

(NETHERL.)28/04/04

IntesaBci 15

Figure 9 – RICH A

Richest A Financial Corporate Bonds (Real YTM wrt Fair YTM)

0,00

5,00

10,00

15,00

20,00

25,00

30,00

35,00

40,00

45,00

50,00

BNP PARIB

AS 30/10

/12

INTERNATIO

NAL ENDESA 08

/11/06

BANK OF IR

ELAND 10

/02/10

RAIFFEISEN ZENTRALBANK 27

/03/03

SNS BANK N

EDERLAND 21

/09/04

SNS BANK N

EDERLAND 15

/10/07

CCCI 26/0

4/10

FORTIS FIN

ANCE NV 17

/10/03

CCCI 16/1

0/12

BAYERISCHE H

YPO UND V

EREINSB. 0

2/02/0

4

BAYERISCHE H

YPO UND V

EREINSB. 1

2/07/0

5

CCCI 25/0

4/11

NATWEST BANK 30

/06/11

FORTIS FIN

ANCE NV 07

/04/09

BAYERISCHE H

YPO UND V

EREINSB. 1

5/01/1

0

ALLGEMEIN

E HYPO 15

/09/08

FORTIS FIN

ANCE NV 19

/09/05

NUERNBERGER HYPO 11

/02/08

NUERNBERGER HYPO 23

/01/07

Figure 10 – CHEAP A

Cheapest A Finacial Corporate Bonds (Real YTM wrt Fair YTM)

-70,00

-60,00

-50,00

-40,00

-30,00

-20,00

-10,00

0,00BSCH IS

SUANCE 06/07

/09

BSCH ISSUANCE 05

/07/10

UNIBAIL

30/01

/06

UNIBAIL

15/06

/06

COMMERZBANK 12/07

/10

LINDE FIN

ANCE 14/06

/07

BNP PARIBAS 07

/08/08

LINDE FIN

ANCE 27/02

/04

ROYAL BANK O

F SCOTLAND 22

/07/08

SOCIETE GENERALE

27/04

/15

UNICREDITO IT

ALIANO 16

/03/11

SOCIETE GENERALE

12/03

/07

ING BANK 01

/10/07

ING BANK 23

/02/09

DRESDNER BANK 01

/04/03

FORTIS LU

X FINANCE 1

6/02/1

6

SOCIETE GENERALE

05/11

/12

CCCI 25/0

4/08

IntesaBci 16

Figure 11 – RICH BBB

Rich BBB Financial Corporate Bonds (Real vs Fair YTM)

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

HEIDELB

ERGER ZEMENT FINANCE B

V 09/04

/09

HEIDELB

ERGER ZEMENT FINANCE B

V 22/02

/07

IMPERIAL T

OBACCO FINANCE 15

/03/04

METRO FINANCE B

V 12/07

/04

FIAT FIN

ANCE AND TRADE LT

D 13/12

/06

BANCA NAZIO

NALE D

EL LAVORO 15

/03/04

BCP FINANCE BANK LT

D 29/03

/11

ALLIE

D DOMECQ FIN

ANCIAL S

ERVICES 14

/12/05

IMPERIAL T

OBACCO FINANCE 27

/09/06

ALLIE

D DOMECQ FIN

ANCIAL S

ERVICES 18

/04/06

CREDIT LYONNAIS

16/09

/04

METRO FINANCE B

V 09/03

/06

Figure 12 – CHEAP BBB

Cheap BBB Financial Corporate Bonds (Real vs Fair YTM)

-80,00

-70,00

-60,00

-50,00

-40,00

-30,00

-20,00

-10,00

0,00TPSA EUROFIN

ANCE BV 01/03

/06

PARMALAT FIN

ANCE CORP BV 08

/12/03

TPSA EUROFINANCE BV 27

/10/04

TPSA EUROFINANCE BV 13

/03/07

PARMALAT FIN

ANCE CORP BV 30

/03/09

FIAT FIN

ANCE AND TRADE LT

D 17/10

/03

PARMALAT FIN

ANCE CORP BV 06

/02/06

FIAT FIN

ANCE AND TRADE LT

D 01/08

/05

FIAT FIN

ANCE AND TRADE LT

D 31/03

/04

SOL MELIA

EUROPE B

V 09/02

/06

METALLGESELL

SCHAFT FINANCE BV 25

/07/05

FIAT FIN

ANCE AND TRADE LT

D 25/05

/06

PARMALAT FIN

ANCE CORP BV 23

/10/07

PARMALAT FIN

ANCE CORP BV 23

/06/04

FIAT FIN

ANCE AND TRADE LT

D 24/02

/10

CREDIT LYONNAIS

06/11

/02

PARMALAT FIN

ANCE CORP BV 07

/02/05

PARMALAT FIN

ANCE CORP BV 25

/07/08

BANQUE WORMS S

A 24/02

/03

IntesaBci 17

Appendix 3 : Nodes And Estimated Coefficients

Table 6 – B-SPLINE NODES IN THE TIME-TOMATURITY DOMAIN: BUND

B-Splines GOVERNMENT Start End

NODO 1 -2700 900 NODO 2 -1800 1800 NODO 3 -900 2700 NODO 4 3600 NODO 5 900 4500 NODO 6 1800 10800 NODO 7 2700 18900 NODO 8 3600 28800 NODO 9 4500 40500 NODO 10 10800 NODO 11 18900 NODO 12 28800 NODO 13 40500

Table 7 – B-SPLINE NODES IN THE TIME TO-MATURITY DOMAIN: AAA

B-Splines SPREAD AAA Start End

NODO 1 -4200 2100 NODO 2 -2100 4200 NODO 3 4250 NODO 4 2100 4300 NODO 5 4200 NODO 6 4250 NODO 7 4300

Table 8 – B-SPLINE NODES IN THE TIME-TOMATURITY DOMAIN: AA

B-Splines SPREAD AA Start End


IntesaBci 18

Table 9 – B-SPLINE NODES IN THE TIME TO MATURITY DOMAIN: A

B-Splines SPREAD A Start End


Table 10 – B-SPLINE NODES IN THE TIME TO-MATURITY DOMAIN: BBB

B-Splines SPREAD BBB Start End


Table 11 – ESTIMATED COEFFICIENTS FOR SPLINE FUNCTIONS Coef f icient i St d. Er ror (HAC) P-VALUE

GOVT 3846.27 33.113592.55 7.853350.40 6.342992.62 6.652643.56 12.185755.67 58.737114.86 111.89

36492.03 2408.20AAA 61.72 29.26 0.0350

-42.56 16.55 0.0102-69.97 17.27 0.0001-59.55 16.07 0.0002

AA 147.65 51.22 0.0040-104.33 29.92 0.0005-135.40 34.20 0.0001-124.52 45.98 0.0068

A 195.04 79.64 0.0144-148.71 51.29 0.0038-432.68 87.36-538.18 201.43 0.0076

BBB 50.92 36.02 0.1576-39.99 21.42 0.0620

-231.77 28.81-477.82 49.73

IntesaBci 19

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