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The BPAM Bond Index -FiiXTM
Financial Engineering and ResearchDarryl FooJanuar 2009
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AGENDA
The purpose of todays presentation is to introduce the BPAM Bond Index FiiXTM
from a bond
The BPAM Bond Index - FiiXTM
market players point of view
ntro uct on
Index Objectives
Methodolo Overview
Benefits
Index Facts
Delivery Channels
Appendix
Construction Rules
Formulas
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Introduction
Introducing BPAM Ringgit Bond Index - FiiXTM
The BPAM Ringgit Bond Index (FiiXTM) has been created inresponse to the existing pricing customers and marketparticipants demand for a broad and representative index.
The Index is a by-product of BPAMs bond pricing and info
business.Daily marked-to-market (MTM) price for 1900+ ringgit bondsComprehensive database for ringgit bonds via website and
BondStream
The index is a rules-based, market value-weighted. The
hallmark of a rules-based index is transparency and broadlyspeaking, predictability.
The index is subdivided into as many as 300+ Sub-Indicesbased on a variety of sector, credit and maturityclassifications.
Index and Sub-Index returns (total, price and coupon) arecalculated and rebalanced daily.
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Index Objectives
BPAM Ringgit Bond Index is designed to provide relatively broad, stable and relevantmarket benchmarks. To achieve this goal, we adhere to the following objectives:
AccurateReflect the performance of new investments and existing holdings under a realistic representation of market conditions
Broad
Represent as many asset classes as possible that are realistically available to market participants under normal marketconditions
Contains accessible characteristics and informationr ce, coupon rate, urat on, etc. are a ava a e an access e or nvestors. n ormat on s ou a so e stor ca , or
example, price/yield history
Investable
Bonds are investable and do not contain barriers of entry
Replicable The total returns reported for an index should be replicable by market participants
StableComposition changes of the index should occur infrequently unless it breaches the pre-specified ground rules and
should be easily understood and highly predictable
TransparentA clear set of rules should govern inclusion of bonds or markets in an index, and investors should be able to forecast
and agree on changes in composition. Information and Methodology paper is readily available
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Methodology Overview
The purpose of the Index is to measure the average performance that holders of the relevanttype of bonds experience over time. This is achieved by creating a representative portfolio ofbonds, and measuring their performance
BondIndex
Bond Index comprise of
a series of sub-indices
Aggregate
Bond Sub-
Indices
Sub-Indices representcharacteristics of segments
that are within the overallindex characteristics
Govt /Pseudo
All Corp
MGS/GII Quasi CorpFinance Corp-Guar
Bond Constituents For
Individual Indices
Bonds are grouped asconstituents for indices
Bonds are grouped to
agamas azana
Bonds across segments and classes
represent a targetedcharacteristic of the indices
segrega e n o su - n ces.
Selection via pre-defined rules
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Methodology Overview
The purpose of the Index is to measure the average performance that holders of the relevanttype of bonds experience over time. This is achieved by creating a representative portfolio ofbonds, and measuring their performance
Family
BPAM Ringgit Bond Index
ALLAggregate
BondIndex
Bond Index comprise of
a series of sub-indices
Conv All Islm All
All typesGovernment
Quasi-government
Bank Negara NotesCorporate-guaranteed
Sub-Indices
Bond Sub-
Indices
Sub-Indices representcharacteristics of segments
that are within the overallindex characteristics
orpora eFinancial
Maturity (years):All tenures, 0.25-1, 1-3, 3-7, 7 overBond Constituents For
Individual Indicesat ngs:
Non Rated Goverment and QuasiGovernments,
AAA, AA, A, BBB
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Methodology Overview
At the close of each business day, the index constituents are reviewed. At this review,bonds may be added or removed according to following pre-defined rules
ReviewOutstanding Amount Rule
Eligible Bonds Rule
Credit Rule
Tenure Rule
Index and Sub-Indices Constituents
Bonds 107
108
109
Etc
Review
102
103
104
105
106
100
101
03/01/2007
03/02/2007
03/03/2007
03/04/2007
03/05/2007
03/06/2007
03/07/2007
03/08/2007
03/09/2007
03/10/2007
03/11/2007
03/12/2007
03/01/2008
03/02/2008
03/03/2008
03/04/2008
03/05/2008
03/06/2008
03/07/2008
03/08/2008
03/09/2008
03/10/2008
03/11/2008
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Benefits
Beneficial uses of the index for users.Market Driven Products developed in close cooperation with leading market participants Takes into account of local market conventions and behavior
Established International Standard The construction rules and calculation methodology broadly follow the EFFAS Standardised Rules
Accurate and Stable Data Source Direct MTM bond prices feed from our pricing service
Variety of Choices Choice out of 300+ sub-indices to ensure the specific needs of market participants are meet, be it in performance
measurement or data for portfolio research
User Friendly Navigation Index constituents, statistics and individual bond returns are available Customisable charts to analyse return performances and relative performances of different sub-indices
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Benefits
Performance benchmarking
Benchmark oferformance measurement
0.25%
Daily returns of bond funds against the All Bond Index
FiiXTM All Bond Index
Demonstrate added valueto intended sponsors for
fund managers0.15%
0.20%Bond Fund A
Bond Fund B
Bond Fund C
0.00%
0.05%
0.10%
-0.10%
-0.05%
02/01/2009
03/01/2009
04/01/2009
05/01/2009
06/01/2009
07/01/2009
08/01/2009
09/01/2009
10/01/2009
11/01/2009
12/01/2009
13/01/2009
14/01/2009
15/01/2009
16/01/2009
17/01/2009
18/01/2009
19/01/2009
20/01/2009
21/01/2009
-0.20%
-0.15%
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Benefits
Performance benchmarking using sub-indices
Benchmark oferformance measurement
0.25%
Daily returns of bond funds against the Corporate AllSub-Index
Bond Fund A
Demonstrate added valueto intended sponsors for
fund managers0.15%
0.20%Bond Fund B
Bond Fund C
FiiXTM Corporate All Sub-Indice
0.00%
0.05%
0.10%
-0.10%
-0.05%
02/01/2009
03/01/2009
04/01/2009
05/01/2009
06/01/2009
07/01/2009
08/01/2009
09/01/2009
10/01/2009
11/01/2009
12/01/2009
13/01/2009
14/01/2009
15/01/2009
16/01/2009
17/01/2009
18/01/2009
19/01/2009
20/01/2009
21/01/2009
-0.20%
-0.15%
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Benefits
Assessing the bond market - All bond total return index 3 Jan to 1 Dec 2008
108
109
FiiXTM All Bond Index BNM cut OPR from3.5% to 3.25%
FiiXTM Simple
Average Returns
1 Month 2.55%
106
107
Heightened expectations ofaggressive rate cuts in theU.S.
Spate of negative news in worldfinancial market. Worldwide stock
markets collapsed. Flight-to-safety.
3 Months 4.45%
6 Months 3.07%
12 Months 4.83%
104
105
101
102
Crude oil price escalating. Fearof possible interest rate hikebecause of inflation.
.Brothers filedbankruptcyprotection.
2. AIG sufferedliquidity crisisfollowing
100
03/01/2008
03/02/2008
03/03/2008
03/04/2008
03/05/2008
03/06/2008
03/07/2008
03/08/2008
03/09/2008
03/10/2008
03/11/2008
.
shoots to 7.7% YoY
its credit rating.
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Benefits
Assessing inter-markets KLSE and All bond total return index 3 Jan to 1 Dec 2008
1500
1600
108
109
KLSEFiiXTM All Bond IndexFiiXTM Simple
Average Returns
1 Month 2.55%
1300
1400
106
1073 Months 4.45%
6 Months 3.07%
12 Months 4.83%
1100
1200
104
105 KLSESimple
Average Returns
1 Month -1.76%
3 Months -22.91%
900
1000
101
102
- .
12 Months -39.27%
800100
03/01/2008
03/02/2008
03/03/2008
03/04/2008
03/05/2008
03/06/2008
03/07/2008
03/08/2008
03/09/2008
03/10/2008
03/11/2008
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Benefits
Assessing correlation with data sets CPI and All bond total return index 3 Jan to 1 Dec 2008
FiiXTM Simple
Average Returns
1 Month 2.55%8%
9%
108
109
3 Months 4.45%
6 Months 3.07%
12 Months 4.83%7%
106
107
CPI 2008 Y-o-Y
Increase (%)
Nov 5.7%
Oct 7.6%
5%
6%
104
105
.
Aug 8.5%
Jul 8.5%
Jun 7.7%
Ma 3 8%
3%
4%
101
102
.
Apr 3.0%
Mar 2.8%
Feb 2.7%
Jan 2.3%
2%100
03/01/2008
03/02/2008
03/03/2008
03/04/2008
03/05/2008
03/06/2008
03/07/2008
03/08/2008
03/09/2008
03/10/2008
03/11/2008
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Benefits
Trend analysis and duration strategy
112
All Total Return Index By Tenure Buckets
ALLUsing index data may
rovide indication of market
108
110
1-3 Years
7+ Years
trend
Understanding markettrend in this case providesopportunities to useSustained bull
In bearmarket,
implication isto hold shortterm bondsas a
104
106
portfolio management2
holding longterm bonds asa favouredstrategy
strategy
98
100
102
96
03-Jan-07
03-Feb-07
03-Mar-07
03-Apr-07
03-May-07
03-Jun-07
03-Jul-07
03-Aug-07
03-Sep-07
03-Oct-07
03-Nov-07
03-Dec-07
03-Jan-08
03-Feb-08
03-Mar-08
03-Apr-08
03-May-08
03-Jun-08
03-Jul-08
03-Aug-08
03-Sep-08
03-Oct-08
03-Nov-08
03-Dec-08
03-Jan-09
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Benefits
Data for fixed income research volatility study for market risk assessment
Ability to conduct fixedincome research, in this
0.12%
One Day Volatility Study 2-4 Years Segment
Volatility
case, volatility computationto input into a market risksystem
Provides objective0.09%
0.10%
0.11% A
VolatilityAA
VolatilityAAA
the potential portfolio lostthrough Value-at-Risk(VaR) models
An alternative to yield
0.07%
0.08% VolatilityCagamas
VolatilityGII
, . .class index volatility
0.04%
0.05%
0.06%VolatilityMGS
0.03%
04/01/2008
04/02/2008
04/03/2008
04/04/2008
04/05/2008
04/06/2008
04/07/2008
04/08/2008
04/09/2008
04/10/2008
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Benefits
Data for fixed income research beta & alpha statistics for portfolio risk-return characteristics
rn
Putrajaya Hldgs 05/07/11 vs BPAM Ringgit Bond IndexPrice Return from 28-Sep-2007 to 30-Sep-2008 Ability to conduct fixed
income research, in this=
y = 0.35x - 0.0001
0.60%
0.85%
7/11Clean
Retu case, compute beta, alpha
and R squared statisticson index vs bond returnsfollowing CAPM andportfolio management
)(
),(
on
market
marketbond
mar etbondbond
rVar
rrCov=
= .
0.10%
0.35%
- - - -
Putra05/
Provides objectiveassessment of bond pricevolatility against indexs
Alpha of -0.0001 meansover the period,irrespective of Index'sdaily return, the bond was
-0.011% return per day.In a year this translates to-2.75% a ne ative
-0.40%
-0.15%
. . . . . . . .
All Bond Price Index returns
assessment of bonds riskand return characteristics
. ,performance
Beta of 0.35 means a 1%increase or decrease inmonthly returns of indexwas accompanied by a0.35% increase ordecrease in Putra's
-0.90%
-0.65%
returns
R2 of 16.6% means16.6% of variation inPutra's return isaccounted for byvariability in index
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Benefits
Technical analysis
Technical analysis forformulatin tradin
99
100
Bollinger, EMA, SMA Technical Indicators from 30/09/2007 to 30/09/2008
strategies
95
96
97
98
20-Day SMA + Bollinger
- Bollinger 12-Day EMA
26-Day EMA
94
26/10/2007
26/11/2007
26/12/2007
26/01/2008
26/02/2008
26/03/2008
26/04/2008
26/05/2008
26/06/2008
26/07/2008
26/08/2008
26/09/2008
40
50
60
70
80
90
100
,
RSI
0
10
20
30
19/10/2007
19/11/2007
19/12/2007
19/01/2008
19/02/2008
19/03/2008
19/04/2008
19/05/2008
19/06/2008
19/07/2008
19/08/2008
19/09/2008
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Index Facts
Data as of 31-Dec-2008Sector Breakdown By Market Capitalisation Rating Breakdown By Market CapitalisationBNM0.12%
CorpGuaran-
teed1.31%Quasi Gov
10.33%
A1.27%
AABBB
0.12%
Quasi-Others5.12%
GII10.99%
Khazanah1.96%
Corporate
24.25%
.
AAA9.39%
BNM0.12%
Financial1.95%Gov
62.04%
Cagamas3.25%
MGS51.05%
Number Of Bonds 695
Market Capitalisation (RM million) 403,793
Average Coupon (%) 4.66
Issuer Market Cap (RM million) Weight
Government of Malaysia 250,449.67 62.03%
Cagamas Berhad 13,118.44 3.25%
.
Average Tenure (Days) 2091
Average Duration 4.61
Average Convexity 37.37
Binariang GSM Sdn Bhd 11,989.40 2.97%
K.L. International Airport Berhad 8,644.12 2.14%
Khazanah Nasional Berhad 7,916.63 1.96%
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Delivery Channels
Three different delivery modes to suit clients requirements
Ftp Feed for Customised Index
Web - www.bpam.com.my
110.75
111.75
107.75
108.75
109.75
104.75
105.75
106.75
102.75
103.75
99.75
100.75
.
3-Jan-07 3-Mar-07 3-May-07 3-Jul-07 3-Sep-07 3-Nov-07 3-Jan-08 3-Mar-08 3-May-08 3-Jul-08 3-Sep-08 3-Nov-08 3-Jan-09
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AGENDA
The purpose of todays presentation is to introduce the BPAM Bond Index FiiX
TM
from a bond
The BPAM Bond Index - FiiXTM
market players point of view
ntro uct on
Index Objectives
Methodolo Overview
Benefits
Index Facts
Delivery Channels
Appendix
Construction Rules
Formulas
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Construction Rules
BPAM all bond index bond inclusion rules compared to other indices
RulesItems * **
Defining the index universe
Currency Ringgit Ringgit U.S. dollars
AmountOutstanding
>= 50 milN/a for Govt>= 150 mil for corporate
>= 500 mil
RatingInvestment-grade rating, BBB3/BBB- andabove
A1 and aboveInvestment-grade rating, BBB3/BBB- andabove
Eligible
Instruments
Zero-coupon, fixed-coupon, bullet and
bonds with secondary-notes
Zero-coupon, fixed couponOption-free fixed rate bonds, make (wholebonds)
Base Date 2007 1994 1996
IndexReturn Type
Total return, price return, coupon return Total returnTotal return (represented in terms ofannualized yield)
Average Coupon, modified duration, convexity,modified duration convexit ield
Coupon, macaulay duration, modified
Risk Stats yield, tenure, ,
duration, market value, price, yield, tenure
* Malaysian Bond Index (2005)
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** Dow Jones Corporate Bond Index (2006)
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Construction Rules
BPAM all bond index bond inclusion rules compared to other indices
RulesItems * **
Defining the index universe
Principle Conventional and Islamic Conventional Conventional
Maturity0.25 to 1yr , 1 to 3 yrs, 3 to 7 yrs, above7yrs
1 to 3 yrs, 3 to7 yrs, above 7 yrs1 to 5 yrs, 5 to 10 yrs, above 10 yrs1 to 10 yrs, All yrs
1.5 to 3.5 yrs, 3.5 to 7.5 yrs, 7.5 to 17.5yrs,above 17.5
CreditGovernment, Pseudo Government andSupras, Corporate
Government, Khazanah, Cagamas andCorporate
Corporate
Price
Source
Marked-to-market prices from Bond
Pricing Agency Malaysia
Average bid levels from at least two sources One mid / bid / ask level from Reuters
Weighting Market capitalisation Market capitalisation Equal weighted
Settlement Next business day (T+1) n/a n/a
Re-Cash flows are reinvested into the index Cash flows are reinvested into the index n/a
investment
* Malaysian Bond Index (2005)
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** Dow Jones Corporate Bond Index (2006)
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Construction Rules
BPAM all bond index bond inclusion rules compared to other indices
RulesItems * **
Reviewing and Rebalancing
Timing andFrequency
6.15p.m. daily DailyMonthly, by the end of first day of themonth
FactorsUsed forReview
New issues, credit rating changes,outstanding amount changes, maturity ofissues
New issues, credit rating changes, outstandingamount changes, maturity of issues
New issues, credit rating changes,outstanding amount changes, maturity ofissues
Day ofannounce-ments toactions
taken
N/a as review and rebalancing occursdaily
N/a as review and rebalancing occurs on apricing date (daily)
On the 25th of each month
* Malaysian Bond Index (2005)
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** Dow Jones Corporate Bond Index (2006)
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Formulas
Market capitalisation scheme and descriptive statistics formulas
Market capitalisation/value weighted calculationIndividual security is weighted by its market value giving large issues a greater role in influencing the indexCalculation method intends to emulate portfolio performanceCalculation reflects change from previous days portfolio performance (chain-link method)
Bond constituents daily total return: Indexs Daily Total Return:
where
1,1,
1,1,,,,,
,
)()(
+
++++=
titi
titititititi
tiAIP
AIPIAIPrinPTR
=
+
+=n
j
tjtjtj
tititii
NAIP
NAIPw
1
1,1,1,
1,1,1,
))((
)(=
=n
i
tiiti TRwITR1
,,
Total Return Index:
1)1( += ttt TRIITRTRI
Descriptive statistics calculationIn contrast to Index Returns and Levels, Index Statistics are calculated to reflect the risk profile of the Index, afterrebalancing has occurred, i.e. for the succeeding day
=
=n
i
tiit YwAYYTMaverage1
,')(
=n
tiit APwAPpricecleanaverage ,')(
=
=n
i
tiit MDwAMDdurationaverage1
,')(
=n
tiit CwACconvexityaverage ,')(=i 1
=
=n
i
tiit TwATmaturityaverage1
,')(
=i 1
=n
tiit CRwACRcouponaverage ,')( +
+=
n
tjtjtj
tititi
i
NAIP
NAIPw
,,,
,,,
))((
)('
where
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=i 1 =j 1
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Rule FAQ
Common questions
Why arent option embedded bonds including subordinated debts included as eligible instruments?The basic principles in deciding constituent selection is to have:
Instruments with similar-like features. As of 31-Dec-2008, option embedded bonds make up approximately 6.8%of the bond market in terms of market value. Zero-coupon, fixed-coupon, bullet and bonds with secondary-notesmake up over 90% of the bond market.
Future cashflows should be quantifiable and predictable. In the case of option embedded bonds, although by
market convention option embedded bonds should be redeemed on the call date, abnormal market conditionsare resulting in issuers allowing the optionality lapsed. For example, Bloomberg reported on Feb 11, 2008 WooriBank, South Koreas second-biggest, would not exercise its call options on the $400 million subordinate debts
.This reason is also mainly why the index does not include securitised assets as unscheduled redemption mayoccur subject to trigger events which may or may not happen during the course of the assets life.
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Darryl [email protected] Engineer
Copyright Bond Pricing Agency Malaysia SDN.BHD. - All rights reserved.Copyright Bond Pricing Agency Malaysia SDN.BHD. - All rights reserved.
19-8 , The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur, MalaysiaTel: +603 2772 0899 Fax: +603 2772 0808 Email : [email protected]