Today the Treasury raised another 8.75 billion euros at auction with the issuance of three tranches of as many government bonds already in circulation. Among these was the CcTeu October 15, 2032 with a spread of 1.05% (ISIN: IT0005594467). The gross yield issued was 5.04%. As we will see, this is a particular sovereign bond linked to interest rates. Before hypothesizing an investment, it would be appropriate to understand how it works in order to avoid any disappointment or real burnout.
CcTeu coupon calculation 2032
We said that the gross yield was above 5%.
However, it’s not as it seems. Unlike BTp with fixed coupon, this bond pays a coupon linked to rates every six months. Therefore, what is 5% today may go down or up in six months. It all depends on changes in market rates. Specifically, the peg is to the 6-month Euribor. The coupon every six months for this CcTeu 2032 offers 1.05% more than this reference rate, according to its value in force two days before the start of each benefit period.
In our case, the 6-month Euribor to which the coupon has been linked is the one recorded on April 11, the second working day before the start of the enjoyment period on April 15. This is how the bond is linked to the rates. We take the rate on the agreed date (3.862%) and add it to 1.05%. We obtain a gross annual coupon rate of 4.912% for the current semester. However, we are interested in obtaining the rate for only the semester between last April 15 and next October 15. It is made up of 183 days in a theoretical calendar year of 360 days.
Bond yield depends on rates and prices
So, our rate will be: 4.912% : 360 x 183 ≅ 2.50%. This calculation must be repeated every six months according to the indications above. The yield will also depend on the bond price and not only on the reference rates.
For example, at this moment the CcTeu 2032 can be purchased on the secondary market for just under par, at 99.30 cents. This increases the potential gross yield at maturity. In the coming years, rates will likely be lowered by the European Central Bank and, consequently, the Euribor at the various maturities will fall. This is why the next coupons could be lower on an annual basis than the 5% forecast by today’s issue.
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