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 spread 1.05% (ISIN: IT0005594467). The gross yield was 5.04%. As we will see, it is a particular sovereign bond linked to interest rates. Before considering an investment, it would be advisable to understand how it works so as not to run into any disappointment or real burn.
CcTeu 2032 coupon calculation
We said that the gross return was more than 5%.
However, it is not as it seems. Unlike fixed-coupon BTp, this bond detaches a coupon every six months linked to the rates. Therefore, what is 5% today, in six months could go up or down. It all depends on the variations in market rates. Specifically, the link 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 enjoyment period.
In our case, the 6-month Euribor to which the coupon was linked is that which was recorded on 11 April, the second working day before the start of the benefit period on 15 April. This is how the linking of the bond to the rates occurs. You 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 only for the six months between last April 15th and next October 15th. It is made up of 183 days out of a theoretical solar year of 360 days.
Bond yield depends on rates and prices
Therefore, our rate will be: 4.912% : 360 x 183 ≅ 2.50%. This calculation must be repeated from semester to semester according to the indications set out above. The yield will also depend on the price of the bond and not just 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.
[email protected]
