In this section, we focus on the valuation of debt securities that are not listed on a recognised exchange or traded in the 'over-the-counter' (OTC) markets. Such debt securities should be priced using industry accepted practices.
In basic terms, any interest-bearing instrument is generally referred to as debt (such as discount securities, bonds and floating rate notes). This definition extends to cover zero-coupon notes and bonds, but excludes hybrid and derivative structures.
Valuing a debt security
In most circumstances, we would expect the yield or price adopted in a transaction to be appropriately benchmarked to the market (accounting for the arm's-length principle). When you value a debt security or derive a market yield we would expect you to take factors such as the following into account:
- issue date
- issue price
- early redemption options
- face value
- coupon rate or interest rate
- coupon payment period
- coupon payment date
- accrued interest
- par yield curve (for instance, Government)
- zero yield curve
- forward curve
- credit rating (actual or estimated, issuer or issue)
- credit curve
Price may vary depending on the circumstances and structure of the debt. Where inter-group debt has been issued, we would expect to see the debt priced at market value. Our general expectations about certain debt structures and price are as follows:
- coupon that is equal to the yield to maturity – we would expect to see the bond priced around par
- coupon greater than the yield to maturity – we would expect to see the bond priced at a premium to par (the amount of principal owing on the bond at maturity; this value may include accrued interest, as in the case of a zero-coupon bond)
- coupon that is lower than the yield to maturity – we would expect to see the bond priced at a discount to par
- zero-coupon or discount structure – we would expect to see the issue price lower than the face value.
Where an Australian subsidiary issues debt to an offshore parent, we would expect you to price the issue with reference to factors such as those mentioned above.