Capital Markets Notes

n. 1 - January 2002

INVESTMENT GRADE FINANCIAL CORPORATE

BONDS: TERM STRUCTURE ESTIMATION AND
RELATIVE VALUE

Enrico Bernini – Dean Fantazzini

IntesaBci 1

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.
2 IntesaBci

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.
IntesaBci 3

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).
4 IntesaBci

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

250
240
230
220
210 BBB
200
190
180
170
160
150
140
Spread

130
120
110
100
90 A
80
70
60
50 AA
40
30
20 AAA
10
0
no 2

no 3

no 4

no 5

no 6

no 7

no 8

no 9
02

m 03

03

m 04

04

m 05

05

m 06

06

m 07

07

m 08

08

m 09

09
ag 2

ag 3

ag 4

ag 5

ag 6

ag 7

ag 8

ag 9
0

0
-0

-0

-0

-0

-0

-0

-0

-0
o-

o-

o-

o-

o-

o-

o-

o-
v-

b-

v-

b-

v-

b-

v-

b-

v-

b-

v-

b-

v-

b-

v-
ag

ag

ag

ag

ag

ag

ag

ag
fe

fe

fe

fe

fe

fe

fe
m

Maturity

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.

IntesaBci 5

dispersion of data (and consequently the RMSE).

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

ROOT MEAN SQUARED ERROR

45,00
40,00
35,00
30,00
25,00
20,00
15,00
10,00
5,00
0,00
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.
 6

O
ES
TE
R
R
EI
C
H
IS
C
H
E
H PO
YP ST
D O S
E X TH D S P A
IA EN L R

3,00%
3,50%
4,00%
4,50%
5,00%
5,50%
6,00%
6,50%
7,00%

M KE FIN KA
R
R U AN .
AI AB N N
FF
EI O IC IN C
SE R BA IPA ES E
BA N A
ZE D BO NK L A SE
YE
R D NT G N
R R
EX B
IS A NE E
C ES AL I

3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
H FO
E R DN BA
H T N
BA A M NK DE NC
YP IS ER K YE U N RL Y
O FIN BA
BA U N
N AN K R NIC ED AN
YE D C IS E
R S VE E
N
IS N LI C IPA RL D
C S N RE V H
H

Corporate spread dynamics

E BA DE INS E L AN
H N F
YP K IN B. AL LA AG D
O NE AN
U D C
LG ND EN
FO ND ER E
R VE LAN
EM ES GY
TI R D D
S O EI BA
FI EIN
N ES EU N
AN SB T E NK
IN C . H
E
TE D S
TE N C
U V D YP
R N
R EU H
N IB O
AT A
EU W RE T E
N
U ION UN IL TS ES IC SC PO B
ER AL IB
N A C TD HIS HE ST NG
SO BE EN IL H E C P B
C RG DE E
IE E SA
TE R G UTS HE OS AN
G HY
E
LI EN PO W NO CH KO T B K
N U
D ER
SN E AL ER SS E L NT AN
FI
S N E
BA AN TT EN AN RO K
N N I C
U K NG E EM SC DE LL
ER N B B
N ED AN
R BE ER K
BF BE HA SB .
O R G R F A
YA G LAN D LA
L ER D EU N H GI TS- NK
BA
N H D Y S H
K YP PO C
O O LA TSC WI G YP
F N R MU T E O
SC CC
O C D HE TS EN HE HY
AL BN TL I
LG P P AN
ES G C C KE P
EM AR D W BA EN HA HE N O
EI IB
BA N AS N ES NK OS FT NE BA
FO E S L
H
YE
ED T R NK
R R IN YP H
Curva dei rendimenti a scadenza - Titoli AAA

IS TI O
S G
ER FA BA EN ICH
C
H

The corporate spread dynamics over time matter in valuation.

E FI BA
YP
B N
LA ELI DE SC E
H N N
YP SC
AN K N SC -W HA R.B O
O H I CE D
U SS N
N
SE HE U FT AN
U V E
BA D V AN

Curva dei rendimenti a scadenza - Titoli A

N ER C
W LA RT S-H K
K E AT N T Y
O EIN
F
IR S B
ER DS EM PO
EL . S C CH B E
BS AN
C D D
H
H AF RG
C
U
EP A P T-
C ISS CC
N O
IC M UA I FA
M
SB BO
R N
ED ER C
IT ZB E
D AN D.
O K
EU D
IT
AN E N
AL K TS U
IA C T V
N N
AT O H SC
W C E H CR
ES C
T CI
PF E H
BA
N
A N HY
SO B K D PO
C NP C
IE P C
BR
SO TE AR CI IE
C G IB
FO ET I E N AS
F.
R E G ER
TI E AL
S
BN
Figure 3 – YIELD TO MATURITY CURVE – CORPORATE FINANCIAL AAA

LU NE E
X RA
G
FI L
N E
Figure 4 – YIELD TO MATURITY CURVE – CORPORATE FINANCIAL AA

AN
BN
C G
E

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
IntesaBci

positive and it tends to fluctuate around a positive constant delta defined as the average of
IntesaBci 7

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.
8 IntesaBci

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 5,25
DE007268424= DSL FINANCE 05-dic-02 5,125
DE008394075= DSL FINANCE 04-feb-03 4,5
NL008616736= RABOBANK NEDERLAND 05-mag-03 4,5
DE257463= HYPOTHENKENBANK IN ESSEN 16-lug-03 4,5
DE243351= DSL BANK 17-giu-04 3,5
FR048638= DEXIA MUNICIPAL AGENGY 21-giu-04 4,5
DE215826= MUENCHENER HYPO 01-lug-04 5
NL009569006= RABOBANK NEDERLAND 12-lug-04 3,625
DE343814= WUERTTEMBERGISCGE HYPO 16-ago-04 4,25
NL010251435= RABOBANK NEDERLAND 13-ott-04 4,75
DE226453= DEXIA HYPOTHEKENBANK AG 24-gen-05 4,75
FR049742= DEXIA MUNICIPAL AGENGY 26-apr-05 5
AT005909651= OESTERREICHISCHE KONTROLLB. 08-ago-05 7
DE012285787= BAYERISCHE LANDESBANK 19-gen-06 4,875
DE335656= NUERNBERGER HYPO 23-gen-06 6
DE202783= ALLGEMEINE HYPO 01-feb-06 5,25
AT006347983= OESTERREICHISCHE KONTROLLB. 21-feb-06 6,375
NL012512449= BNG 28-feb-06 4,75
DE251560= BAYERISCHE HYPO UND VEREINS 01-mar-06 4,75
DE009614273= DSL BANK 20-apr-06 3,875
FR049979= DEXIA MUNICIPAL AGENGY 26-apr-07 5,375
DE007901330= DSL BANK 13-ago-07 5,625
DE253803= DEUTSCHE HYPO 06-set-07 5
AT008007594= OESTERREICHISCHE KONTROLLB. 12-set-07 5,75
DE222008= BAYERISCHE HYPO UND VEREINS 15-gen-08 5,5
DE307505= WESTDEUTSCHE LANDESBANK 08-feb-08 5,25
AT008371822= OESTERREICHISCHE KONTROLLB. 25-apr-08 5,25
DE232115= DEUTSCHE GENOSSENSCHAFTS-HYPO 19-giu-08 4,75
DE276476= KREDITANSTALT FUER WIEDERAUFBAU 01-set-08 5,625
DE343738= WUERTTEMBERGISCGE HYPO 02-ott-08 4,25
FR048564= COMPAGNIE DE FINANCEMENT FONCIER 25-ott-08 5,125
DE308150= BFG HYPOTHEKENBANK 06-nov-08 5
DE276078= KREDITANSTALT FUER WIEDERAUFBAU 04-gen-09 5
DE101552= MUENCHENER HYPO 15-gen-09 5
DE309083= LANDWIRTSCHAFTLICHE R.BANK 23-mar-09 5
DE009695729= LANDWIRTSCHAFTLICHE R.BANK 30-apr-09 4,125
DE350904= DEUTSCHE GENOSSENSCHAFTS-HYPO 13-ago-09 5,25
DE236652= DEUTSCHE GENOSSENSCHAFTS-HYPO 01-apr-10 5,5
FR018656= CRH 25-apr-10 5,75
DE102381= LANDESBANK BADEN-WUERTTEMBERG 06-lug-10 5,5
DE276080= KREDITANSTALT FUER WIEDERAUFBAU 11-ago-10 4,75
DE340216= WESTFAELISCHE LANDSCHAFT-BOD. 13-ott-10 5,25
NL011024513= BNG 25-ott-10 5,625
NL012752440= NEDERLANDSE WATERSCHAPSBANK NV 19-apr-11 5,125
DE215860= MUENCHENER HYPO 19-apr-11 4,25
FR018624= CAISSE DE REFINANCEMENT HYPO. 25-apr-11 4,2
NL012319843= BNG 04-lug-11 5,25
DE253795= DEUTSCHE HYPO 14-feb-12 6
DE315955= RHEINBODEN HYPOTHEKENBANK 24-ago-12 5
DE247536= DEPFA DEUTSCHE PFANDBRIEF. 15-gen-13 5,5
FR048572= COMPAGNIE DE FINANCEMENT FONCIER 02-mar-13 5,375
NL008742685= BNG 05-giu-13 5,375
DE276079= KREDITANSTALT FUER WIEDERAUFBAU 17-giu-13 5,125
NL009515119= BNG 10-mar-14 4,5
Table 2 – FINANCIAL CORPORATE BONDS: AA CREDIT RATING CLASS
IntesaBci 9

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
10 IntesaBci

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
IntesaBci 11

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
12 IntesaBci

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

LA
N
D
W
IR
TS
C
KR H
ED AF
IT H TL
AN YP IC
O H
ST TH E
AL EN R
T KE .B
FU AN
ER N K
IN

-2,00
0,00
2,00
4,00
6,00
8,00
10,00
12,00
14,00
16,00
W 30
IE ES /0
D SE 4/
09
ER N
D D AU 16
EX EU FB /0
IA TS 7/
AU 03
M C
U H

-60,00
-50,00
-40,00
-30,00
-20,00
-10,00
0,00
N E 17
LA BF IC H /0
IP 6/
N G YP 13
D H AL O
W YP 06
CR O IR AG
H ES TS O EN /0
9/
TH
2 C G 07
LA TE H EK Y
BN 5/0
G N R AF
4/ D R EN 26
1 11 ES EI TL B /0
BN 0/0 C IC AN 4/
G 3/
BA H H K 05
W N IS E
0 14 K C R 06
ES H .B /1
RA 5/0 BA E
BO 6/1 TF D K AN 1/
0
3 AE E N O K 8
D E BA LI -W N 23
TR
UT NK O SC U O /0
NE ES H ER LL 3/
D E SC DE TE E TT B. 09
R LA E 1
UT HE
G R R N M 2/
D E SC E N LA N EI D BE 09
O D C C SC
R /0
UT HE
S O H H G 7
G 05 M IS
M SC EN SE /0 C AF 06
5 PA H T- /0
UE HE
N
O NS
C / 03 G D E BO 7/
PO SS H N KO
BA CH E IE EU D 10
ST D TS N .1
YE EN N S AF
T E C T R 3/
R ER BA CH S-
H H O 10
AL IS N A FI
N E LL /1
LG CH HY K 1 FT YPO AN PO B. 0
EM E PO 3/ S- C ST 25
BA H HY 01 EM /0
15 08/0
D B
YE EIN YP
E O /0
1 7 PO /04
/ EP EN AN 4/
08
NU RIS HY UN /09 13 10 FA T K
C D /0 D FO 17
ER 8/ D N /0
Appendix 2 : Rich-Cheap Analysis Values

HE PO EU
O N 0
VE 09 EU TS C 6/
IE 04
ES BE HYP 1/0 RE TS C R
T RG O 2/ IN C H
O ER S H E 02
ER UN 06 01 E H /0
ES R H D /0 PF Y 3/
T EI
CH YP VE 3/ KR AN
PO 13
D ER I O RE 06 ED D 14
EU R 2 IT BR /0
T EI SC
CH HE 3/01 INS AN IE 2/
M 12
Figure 5 – Rich Aaa

D S SC
H IS K O / 06 15 ST U F
L /0 .1
FI E G CH
E
NT 1 /0
AL
T
EN 5/
E 8 C 01
DE NA RO
N FU H BN /1
XI NC NO KO EN G 3

Figure 6 – CHEAP AAA

A SS NT LLB ED ER
W H E E R . ER W
ER 28
UE YP 04/0 NS OL 21 R IE H /0
R O 2 C L /0
LA A D Y 2/
H B 2 N 06
DE TT TH /03 A F . 0 / 06 D BO ER PO
XI EM EK SE BA AU 19
TS 8/0 N
A BE EN W K FB /0
M M -H 8/ 0
YP 5 AT N AU
4/
11
UE UN RG BAN
N IC ISC K O ER ED
01
IP 19 SC ER
G AG /0
Rich AAA Financial Corporate Bonds (Real vs Fair YTM)

DS CH
L EN AL E /0 D H LA 9/
F E
24 6/ EU AP N 08
W INA R
AG HY
P /01
08
TS SB D
UE NC HY ENC O 0 /05 BA C AN 13
R Y YE H K
/1
PO 2/
1 R E 0/
DE TT E 0 KR N 04
01 21
/
0/
0 IS PO V
XI EM 5/1
A / 06 8 ED C 19
W M
BE 2/0 07/ H ST
04 /04 IT
AN E BA /0
4/
ES UN RG 2 LA N 11
T IC ISC ST N K
RH DE IP G AL D 20
EI U A L E T
ES /0
NB TSC AG HY FU BA 4/
O N 06
ES OD HE EN PO ER K
T E LA G Y 16 W 19
C R ER N H ND IE /0
H R Y E
26 /08
/0 D BN 1/
E P /0 4
KR ER G 06
25 ICH OT SB 4 ED AU 25
CO /0
4 IS H AN / 07 IT R /1
M CH EK K AN FB 0/

Cheap AAA Financial Corporate Bonds (Real vs Fair Spreads)

0 AB
PA /10 E E O AU 10
G P
NB 8/0
2
ST
B 0
NI O A AL AN 4/
E ST NK /08 T K 01
DE SP 2 FU N BN /0
9
FI AR 4/0 ER ED G
04
NA K A 8/ 1 W ER
/0
NC .1 2 IE LA 7/
EM 1/ D N 11
EN 11 ER D
/0 AU 12
T 2 FB /0
FO 7/
NC AU 04
IE 11
R /0
25 8/
/1 10
0/
08
13
14 IntesaBci

Figure 7 – RICH AA

Rich AA Financial Corporate Bonds (Real vs Fair YTM)

30,00

25,00

20,00

15,00

10,00

5,00

0,00

07
05

03

04
09

07

06

12

08

11
03

4
07
9

11

/1
/0

/1

/0
5/

1/

1/

6/
4/

8/

5/

4/

8/

4/
9/

9/
4/

01
07

05

05
/0

/0

/1

/0
/0

/0

/0

/0

/0

/0
/0

/0
/0

5/
8/

8/

9/
25

19

20

06
25

01

03

20

25
23
29

21
04

.1
)2

)1

)1
BV

O
BV

K
E

)
V

E
P

K
K

BR
(*
L.

L.

L.

AN
C

C
BN

YP

N
N
ER

ER
ER

IA
AN

AN

AN

BA
BA
E

E
EP

EP

D
H

AB
C

AN
H

H
H
FR

FR

FR

EN
ES
AN

AN

ST
O

E
ET

ET
ET

EK
H
R

PF
D

EK
AU
N

N
E

E
C
G

G
(N

(N

(N

D
N
FI
D

FI

D
IS

E
Z-
TH
G

LA
K
E

H
AL

AL

AL
ER
ER

ER
IN

IN

G
N
C

C
O
E

D
C

C
BA
AN

AN

AN

TS
Y
N

YP
H
LO

LO

LO
BA
D

C
N

EU
H
ES

ES

TS
FI

FI

FI
IT

IT

IT

D
R

EU
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ED

ED

H
E

E
D

FA
H
H

C
D
R

R
C
C

TS

EP
T
C

C
TS
TS

TS

ES

EU

D
EU

EU

EU

D
D

FIGURE 8 – CHEAP AA

Cheap AA Financial Corporate Bonds (Real vs Fair YTM)

CAISSE
DEUTSCHE DEUTSCHE NATIONAL DEUTSCHE DEUTSCHE
GENERALI FINANCE BAYERISCHE BAHN DRESDNER DES FINANCE FINANCE
RWE FINANCE FINANCE (NETHERL.) HYPO 10/10/02 ABN AMRO FINANCE FINANCE BV CAISSES… (NETHERL.) ING BANK ABN AMRO (NETHERL.)
INA 28/05/09 18/04/08 12/05/14 20/08/13 Special BANK 24/06/09 15/06/10 04/01/09 31/01/08 04/01/09 29/01/09 BANK 16/05/11 28/04/04
0

-5

-10

-15

-20

-25

-30

-35
 IntesaBci

BN
IN P
TE PA
R R
N

-70,00
-60,00
-50,00
-40,00
-30,00
-20,00
-10,00
0,00
AT IB

0,00
5,00
10,00
15,00
20,00
25,00
30,00
35,00
40,00
45,00
50,00

AS
IO
N 30
/1
AL
EN 0/
12
BS D
ES
C BA
N A
H K
IS R O
08
SU AI F /1
AN FF IR 1/
C E IS EL 06
BS E AN
C 06 EN
D
H /0 ZE
IS 7/ N
10
SU 09 TR /0
AN SN 2/
AL 10
U C S
N E BA BA
IB 05 N N
A /0 K K
IL 7/ N 27
30 10 ED /0
/0 SN ER
3/
03
1/ S
U 06
N BA LA
N
IB N D
A IL K
N 21
15 ED /0
/0 ER
9/
04
6/
C 06
O LA
M N
M D
ER 15
ZB /1
AN 0/
07
LI
N K FO C
D 12 R C
E /0 C
FI 7/
TI
S I 26
N 10 FI /
AN N 04
C AN /1
BN E BA C 0
P 14 E
/0
YE N
PA R V
R
6/ IS 17
IB 07 C /1
H
AS E 0/
LI 07 BA H 03
N YP C
D /0 YE O C
E 8/ R U C
FI 08 IS N I1
N C D 6/
AN H 10
C E VE
/1
R E H R 2
O 27 YP EI
N
YA /0 O SB
L U
2/ N .0
BA 04 D 2/
N 02
K VE
/0
O R 4
SO F EI
N
C SC
IE O
SB
Figure 9 – RICH A

TE TL .1
G A N
2/
07
EN D /0
U ER 22 5
N
Figure 10 – CHEAP A
/0 C
IC AL C
R E 7/
08 N C
ED 27 AT I2
IT /0 W 5/
0
O 4/ ES 4/
SO IT 15
BA T 11
AL FO BA
C IA YE R N
IE N R TI K
TE O IS S 30
G 16 C FI /0
/0 H N
EN E AN 6/
IN ER 3/
11 H C
11
G YP E
BA
AL
E O N
N U V
Richest A Financial Corporate Bonds (Real YTM wrt Fair YTM)

K 12 N 07
01 /0 D /
3/ VE 04
/1 07 R /0
IN 0/ 9
G 07 AL
EI
N
BA LG SB
N .1
K EM
Cheapest A Finacial Corporate Bonds (Real YTM wrt Fair YTM)

23 EI 5/
01
/0 N /1
D 2/ E 0
R 09 FO H
ES R YP
D TI O
N S 15
ER FI
N /0
BA
N A N
9/
FO N U C
08
R K ER E
TI
S
01
N N
/0 V
LU 4 /0
BE 19
X 3 R /0
FI G 9/
N ER
SO N U
05
C AN ER H
IE C N
YP
TE E BE O
G 16 11
/0 R /0
EN 2/ G 2/
C ER 16 ER 08
C H
C AL
I2 E YP
O
5/ 05
04 /1 23
/0
8 1 /1 /0
2 1/
07
15
 16

H
EI
D
EL
BE

-80,00
-70,00
-60,00
-50,00
-40,00
-30,00
-20,00
-10,00
0,00
R
G
ER
ZE
M
TP H EN
S
EI
D T
A EL FI
EU BE N
R R
AN
O C

0,00
10,00
20,00
30,00
40,00
50,00
60,00
70,00
80,00

PA FI G E
R N ER BV
M AN ZE
AL C M
09
AT E EN /0
BV 4/
TP FI T 09
N 01 FI
SA AN /0 N
EU C 3/ IM AN
R E 06 PE C
O C R E
O IA
TP FI
N R L
BV
SA AN P TO 22
BV /0
EU C BA
R E 08
C
2/
07
O BV /1 C
PA FI 2/ O
R N 27
/1
03 FI
M AN
0 N
AL C /0 AN
E 4 C
AT BV E
FI FI M 15
AT N 13 ET / 03
AN /0 R
FI C 3/ O /0
N E 07 FI 4
AN C N
C O FI
PA E R A T
AN
R P C
M
AN B FI E
AL D V N BV
TR 30 AN
AT /0 C 12
FI FI AD 3/ E /0
AT N E 09 AN 7/
04
AN LT D
FI
N C D BA TR
E 1 N
AN C 7/
1 C AD
C O A E
FI E R 0/
N
AT AN P 03 LT
FI D
BV AZ D
N IO 13
AN TR 06 N /1
/0 AL
C AD 2/ E
2/
SO E E 06 D
06
L AN LT
M D D
EL
EL TR 01 LA
IA AD /0 VO
M EU
E
8/ BC R
ET R 05 P O
O LT 15
AL
LG PE D AL
FI
N /0
BV 31 AN 3/
/0 LI 04
ES C
FI E 09 3/ ED E
AT LL /0 04 D BA
SC 2/ O N
FI
N H 06 M K
AN AF EC LT
C T Q D
PA E FI FI
N 29
R AN N /0
M D AN AN
Figure 11 – RICH BBB

3/
AL C C 11
AT TR E IA
L
AD BV
Figure 12 – CHEAP BBB
FI SE
PA
N E IM R
R A 25
M N LT
D /0 PE VI
AL C 7/ R C
E 25 05 IA ES
AT C /0 L
O 14
FI FI
N R 5/ TO
/1
AT P 06 AL BA
AN B V LI C
2/
05
FI
N C ED C
E O
Rich BBB Financial Corporate Bonds (Real vs Fair YTM)

23
AN C D
Cheap BBB Financial Corporate Bonds (Real vs Fair YTM)

O /1 O
C C R 0/ M
FI
N
R E P 07 EC AN
ED AN
D
BV Q C
IT 2 E
LY TR 3/ FI
N 27
O AD 06 AN /0
PA N E /0 C 9/
R N 4 IA 06
M AI
S
LT
D L
AL 06 SE
24
AT /1 /0 R
PA F 1 /0 2 VI
C
IN 2 /1
R 0 ES
M AN
AL C C
18
E R /0
AT C 4/
O ED 06
BA FI
N R IT
N P
Q AN BV LY
U C O
E E 07 N
W C /0 N
O O 2/ AI
R R S
M P 05
M 16
S BV ET /0
SA 25 R 9/
24 /0 O 04
/0 7/ FI
2/ 08 N
03 AN
C
E
BV
09
/0
3/
06
IntesaBci
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
NODO 1 -5000 2500
NODO 2 -2500 5000
NODO 3 5050
NODO 4 2500 5100
NODO 5 5000
NODO 6 5050
NODO 7 5100
18 IntesaBci

Table 9 – B-SPLINE NODES IN THE

TIME TO MATURITY DOMAIN: A
B-Splines SPREAD A
Start End
NODO 1 -5200 2600
NODO 2 -2600 5200
NODO 3 7800
NODO 4 2600 10400
NODO 5 5200
NODO 6 7800
NODO 7 10400

Table 10 – B-SPLINE NODES IN THE

TIME TO-MATURITY DOMAIN: BBB
B-Splines SPREAD BBB
Start End
NODO 1 -2400 1200
NODO 2 -1200 2400
NODO 3 3600
NODO 4 1200 4800
NODO 5 2400
NODO 6 3600
NODO 7 4800

Table 11 – ESTIMATED COEFFICIENTS FOR SPLINE FUNCTIONS

Coe f f icie n t i St d . Er r or (HAC) P-VALUE
GOVT 3846.27 33.11
3592.55 7.85
3350.40 6.34
2992.62 6.65
2643.56 12.18
5755.67 58.73
7114.86 111.89
36492.03 2408.20
AAA 61.72 29.26 0 .0 3 5 0
-42.56 16.55 0 .0 1 0 2
-69.97 17.27 0 .0 0 0 1
-59.55 16.07 0 .0 0 0 2
AA 147.65 51.22 0 .0 0 4 0
-104.33 29.92 0 .0 0 0 5
-135.40 34.20 0 .0 0 0 1
-124.52 45.98 0 .0 0 6 8
A 195.04 79.64 0 .0 1 4 4
-148.71 51.29 0 .0 0 3 8
-432.68 87.36
-538.18 201.43 0 .0 0 7 6
BBB 50.92 36.02 0 .1 5 7 6
-39.99 21.42 0 .0 6 2 0
-231.77 28.81
-477.82 49.73
IntesaBci 19

REFERENCES
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