Venture Development Bonds
Venture Development Bonds
The aim of the project was to analyse a new instrument for development finance. The so called "Venture Development Bonds" are sovereign bonds that are linked to major macroeconomic variables (particularly the GDP; GDP-linked bonds). The major parts of the project: (1) Determination of important product characteristics, (2) Analysis of the market potential (supply, demand, liquidity,...), (3) Analysis of the stochastic properties of the bond prices. The stochastic properties of the following types of GDP-linked bonds have been analyzed: - coupon linked to GDP index, redemption at par - coupon and redemption linked to GDP index, - coupon linked to year-on-year change of GDP (instead of GDP index) and combination with different options such as [redemption >= par value] Important results of the project: - the structure of GDP-linked bonds should be as simple as possible to increase market potential, - the GDP of countries that want to issue GDP-linked bonds should have the following characteristic: low or even negative correlation of GDP (country) to GDP (world). This increases the possibility to diversify GDP-risk in the bond portfolio of the investor, - GDP statistics should be controlled by an international organisation to increase confidence of the investors in the reliability of GDP measurement. Application of SDDS of the IMF is recommendable. - Use of the revised or final GDP statistics to calculate the cash flows of the bond (instead of the first announcement of GDP). This reduces incentives to manipulate the data. - The market potential will be relatively small compared to convetional bonds.