Inferring Structured-Note Funding from Its Option and Issuer Bonds

Summary

The document outlines a way to estimate the funding component of a par-issued, fully funded structured note. First, value the embedded option and subtract that value from the issue price to infer the price allocated to the zero-coupon bond. Then convert that bond price and maturity into a yield, and compare the yield with a nearby government bond yield to express the issuer funding level as a spread.

For comparing banks, the answer recommends observing the yield on the issuer’s conventional bonds with a similar maturity. It treats those bonds as a practical indicator of the funding rate available to the structured-note desk. The method is a simplified decomposition: it assumes the note is issued at par and depends on having a defensible option valuation and a suitable government or issuer-bond comparison. It does not specify valuation models, conventions, or adjustments for credit, liquidity, or cross-currency effects.

Key ideas

• For a par-issued note, the inferred zero-coupon bond price is the issue price less the embedded option value.
• Convert the inferred bond price into a yield using the bond’s maturity.
• Compare that yield with a nearby government bond yield to estimate a funding spread.
• Similar-maturity vanilla bonds from the same issuer can indicate the issuer’s funding rate.

Tags

# Zero Coupon Bonds for Structured Products


# Zero Coupon Bonds for Structured Products












I'd like to find out how to calculate the level of a zero coupon bond that goes into a fully funded structured product. Let's say SocGen or JPM issue a 2Y fully funded structured note (zero coupon + option) in USD or EUR, then based on the available market data, i.e. swap rates, xccy swap rates, CDS, etc. how could I figure out the level of funding (rate) they provide to investors, i.e. what is the price of a zero coupon bond they issue.

## Answer by dm63 (score 4, accepted)

https://quant.stackexchange.com/a/77166

You just subtract the price of the option from 100 (assuming the structured note is issued at par), giving the price of the zero coupon bond. Then, you calculate the yield of the zero coupon bond given its price and maturity. Finally, you subtract the yield of the nearest risk free government bond, to get the spread over governments.

Edit to answer your question: how we can figure out these funding rates for different banks with different ratings and with different CDS spreads.

The easiest way is to observe the yield of vanilla bonds issued by the same issuer in the same maturity( or as close as you can get). This will determine the funding rate given by the bank Treasury to the structured note desk.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.