A guide to Brazil Government Bonds
Brazil’s main public fixed-income securities are Brazil government bonds issued by the National Treasury. The government issues these securities to raise funds to help pay/settle their obligations, such as paying wages and investing in education and health. Government bonds are divided into two categories: floating rate bonds and fixed rate bonds.
In floating rate bonds, the return to maturity is determined at the time of purchase. The return on fixed-rate bonds depends on their indexed interest rate-Selic or IPCA.
| Bond | Category | Index | Issue Term (General Rule) | Interest Coupon | Principal Redemption | Early Redemption |
| LTN | Fixed Rate | None | Up to 4 years | None | At maturity at par value | If the bond is traded before maturity, the market value shall prevail, so its profitability may be higher or lower than that contracted on the purchase date. |
| NTN-B | Floating Rate | IPCA | Up to 40 years | 6% p.a. paid half yearly | At maturity at par value, added of the respective bond’s yield from its base date. | If the bond is traded before maturity, the market value will prevail both for the purchase and sale. At maturity, the bond presents a single principal payment flow, which is updated through the IPCA from the purchase date, along with the last interest coupon. |
| NTN-F | Fixed Rate | None | Up to 10 years | 10% p.a. paid half yearly | At maturity at par value | If the bond is traded before maturity, the market value will prevail so that the profitability may be higher or lower than that contracted on the purchase date. |
| LFT | Floating Rate | Selic | Up to 5 years | None | At maturity at par value, added of the respective bond’s yield from its base date. | At the price for which the bond is being traded and the premium or discount received on purchase is already included. Therefore, it is not necessary to add the rates to the calculation of profitability. |
| Bond | Category | Index | Issue Term (General Rule) | Interest Coupon | Principal Redemption | Early Redemption |
| LTN | Fixed Rate | None | Up to 4 years | None | At maturity at par value | If the bond is traded before maturity, the market value shall prevail, so its profitability may be higher or lower than that contracted on the purchase date. |
| NTN-B | Floating Rate | IPCA | Up to 40 years | 6% p.a. paid half yearly | At maturity at par value, added of the respective bond’s yield from its base date. | If the bond is traded before maturity, the market value will prevail both for the purchase and sale. At maturity, the bond presents a single principal payment flow, which is updated through the IPCA from the purchase date, along with the last interest coupon. |
| NTN-F | Fixed Rate | None | Up to 10 years | 10% p.a. paid half yearly | At maturity at par value | If the bond is traded before maturity, the market value will prevail so that the profitability may be higher or lower than that contracted on the purchase date. |
| LFT | Floating Rate | Selic | Up to 5 years | None | At maturity at par value, added of the respective bond’s yield from its base date. | At the price for which the bond is being traded and the premium or discount received on purchase is already included. Therefore, it is not necessary to add the rates to the calculation of profitability. |
Risks of Brazil Government Bonds
- Credit risk: The possibility that the issuer (in this case the government) fails to pay interest and principal on the agreed date. This risk is measured using a variety of methods, such as EMBI+ (Risk Brazil) and ratings issued by rating agencies.
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- EMBI+ (Risk Brazil): EMBI+ (Emerging Market Bond Index) is a bonus based index (debt bond) issued by emerging countries. It shows the daily financial returns of selected bond portfolios from these countries. The unit of measurement is the base point. 10 basis points are equivalent to one-tenth of 1%. These points show the difference between the yields of emerging country bonds and the yields offered by bonds issued by the US Treasury Department. This difference is the spread, or sovereign spread.
- Rating Agencies: Sovereign credit ratings are scored by institutions that specialize in credit risk analysis on bond-issuing countries. These rating agencies evaluates a country’s ability and willingness to repay debt in a comprehensive and timely manner. This rating is a relevant tool for investors because it provides independent opinions on the debt credit rating of the country being assessed. Officially, Brazil has signed credit rating agreements with the following institutions: Standard & Poor’s (S&P), Fitch Ratings (Fitch) and Moody’s Investor Services.
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- Market Risk: Fluctuations in Brazil government bonds prices caused by changes in interest rates and inflation rates. Due to a variety of factors, the interest rate curve may change, leading to changes in government bond prices. Since interest rates are inversely proportional to unit prices, an increase in one causes a decrease in the other.