The financing of public agencies and their risk measurement tool-min

The financing of public agencies and their risk measurement tool

General idea

Fixed income products are instruments with a low associated risk and a given return, i.e. known in advance. 

It is true that there are many other more profitable investments, but fixed income offers greater guarantees.

What is happening?

What are they used for? Well, companies that need financing can resort to equities or fixed income and, in today’s post, we will talk about the latter.

Let’s imagine that a company needs financing and decides to issue fixed income securities in order to raise capital. These securities are used to obtain this financing, thus attracting the money of potential investors to later pay them back with interest.

Interest can be collected implicitly (where it is collected at maturity) or explicitly (it is collected periodically until maturity).

The Association of Intermediaries in Financial Assets (AIAF) is the secondary fixed-income market in which financial assets previously issued by private companies, financial institutions and public administrations to raise funds and finance their activity are traded. A distinction can be made between

Public fixed income, issued by any public body, with the aim of obtaining information, as mentioned above, both from private individuals and from other public bodies. These securities are traded on the Public Debt Book-Entry Market, governed by the Bank of Spain. They are divided into:

  1. Treasury bills. These are short-term securities issued for up to one year. Investors buy these bills at a lower price than they will receive in the future, and if they wish to sell them before maturity, the interest rate will not vary significantly, so the risk is minimal. The minimum amount to buy is 1000 euros.
    2. Bonds and government bonds, also called sovereign bonds. These are long-term securities issued by the government to finance its public debt. Bonds are issued for 3 to 5 years, and debentures are issued for 10 to 30 years.

This is where the risk premium comes into play, which is the indicator by which investors see which country offers the lowest risk.

It is calculated by subtracting the 10-year German 10-year bond minus the 10-year bond of the country to be analysed. This percentage differential is the so-called risk premium.

Thus, countries with a higher public debt will increase the interest on their issued instruments (including the 10-year bond) in order to attract potential investors.

Let us take the example of Spain and Germany. 

Germany has an upward trend, it does not need financing as it has no public debt, so Germany’s risk premium stands at 0%.

Spain, on the other hand, has been immersed in an economic crisis for several years, so its interest rates will be higher (thus offering a higher repayment) and with them, its risk premium.

Private fixed income, issued by private companies seeking financing for new projects, to offset debts, capital increases, etc. In this case, companies that decide to issue these securities must report them to the CNMV. The most commonly used products are:

  1. Discounted promissory notes: These offer companies the possibility of better managing their liquidity and cash flow, because they allow them to bring forward the payment of their invoices.
  2. Mortgage certificates: These are basically bonds that are secured by loans from the issuing bank, i.e. whoever acquires them secures their collection against loans secured by real estate.
  3. Bonds: Both public and private debt securities. It is one of the ways of materialising debt securities, fixed or variable income
  4. Bonds: Commitment acquired by a company as a loan, with financial credit institutions.
  5. Preference shares: Shares that have preference over ordinary shares in the payment of dividends. They have no maturity date and their profitability depends on the profits obtained.


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