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A1995-256 Other# · 4 3096608 Lending Rate Formula - Correspondence 02

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,.------- - ----------.---- , -· . • --- ---

FOAM NO. 75 (7-73) WORLD BANK GROUP

ROUTING SLIP DATE

Feb. 21/76 NAME ROOM NO.

/Mr. McNamara

cc: Messrs. Knapp

Carg i 11

Goodman

Rotberg

APPROPRIATE DISPOSITION NOTE AND RETURN

APPROVAL NOTE AND SEND ON

COMMENT PER OUR CONVERSATION

FOR ACTION PER YOUR REQUEST

INFORMATION PREPARE REPLY

INITIAL R ECOMM EN DATION

NOTE AND FILE SIGNATURE

"AEMARKS .

,·Please find attached a set of notes on the issues raised by the U.S. Treasury Working Party. The notes are not yet full-fledged

% z., "position papers" because in the time available it has not been possible to com-plete all the analytical work needed to support definite recommendations and to review these recommendations within the Financial Staff. This accounts for the absence of a section in each not~ detailing a recommended position for the Bank.

FROM

In~ 1./nnrt~' ROOM NO. EXTENSION

E624 6264

•

February 21, 1976

SELECTIVE CAPITAL INCREASE ISSUES RAISED BY U.S. TREASURY TEAM

#1. Ratio of reserves to loans outstanding: _(a) relevance to IBRD standing in financial markets (b) determination of appropriate target (c) measures to achieve that target

#2. Degree of IBRD exposure to risk of interest rate changes: (a) can this risk be measured by comparison of average

maturities of loans and borrowings (b) effects on the risk of changing the- average

maturities (c) effects on the risk of altering IBRD lending rate

pol icy (including setting th~ rate on dis~ursements rather than commitments)

#3. Subsidy element in IBRD lending rate: (a) present policy for setting rate; IBRD net income

objective; relationship between pre- and post-risk targets

(b) · alternative policy: "full-cost lending rate11

(c) signi-ficance of various 11 sp.reads 11

#4. Trend in IBRD borrowing costs relative to other borrowers

Also attached is a table showing the principal amounts outstanding at year end for loans with various loan terms and amortization. · schedules.

Se 1 ect i ve Capita 1 Increase: · Issues Raised by U.S. Treasury Team

Note #1: DECL1NING RATIOS

A. U.S. Perception of the Problem

1. - Continued deterioration in the financial ratios

f17/-;:-/9 2/20/76

in the Treasury view, threaten the standing of the Bank in private capital .,

markets. Treasury staff claim· that even if these ratios have not played an

important part in investors• evaluation of Bank bonds in the past, this is

no guarantee that they wi 11 not do so in the future. Moreover, since no

outside financial analyst has any satisfactory way of determining what

absolute level is appropriate for the various ratios, particular attention

is likely to be focussed on trends in the ratios.

2. ·Most .of our discussion centered upon the ratio of 11 reserves 11

·? (i.e . . retained earnings plus the special reserve) to disbursed loans, though

other financial indicators ·(e.g. interest coverage ratio; 11 spread 11 on

lending) ~ere also mentioned in passing. The question was _initially-_ posed

as follows: what financial policy changes would be required to halt the

dec] ine .in the 11 reserve11 ratio and restore it to the level prevai 1 ing at

the end of FY75 (i.e. 17.9%)? Bushnell was particularly concerned with

identifying measures which would result in the earliest possible reversal

of the downward trend. Cooper seemed more interested in policy changes

which would lead to a levelling off in the 11 reserve 11 ratio. He would not

be pinned down as to what target level might be desirable (he said

11 somewhere between 5% and 20%), though he indicated an interest in policy

packages which would maintain the 11 reserve 11 ratio at various levels

between 10% and 14%.

, ,

- 2 -

B. Analysis of the Problem

3. The first point to make about the Treasury position is that the

ratio chosen to illustrate their case is unlikely to be regarded as

critical by the rating services or private investors--at least not as a

measure of the security of Bank obligations. An analyst concerned about

the ult~mate security of Bank bonds would presumably look first to the

callable capital. If the callable capital of countries considered

"relevant" by the analyst were to be greater than the Bank's funded debt,

then that fact alone could well take care of the problem. It is true, of

course, that the degree of protection afforded by callable capital has

been declining over the last several years using almost any definition of

"relevant" countries. Hence, even if the analyst were satisfied with the

present position, he might reasonably question whether a continuation of

recent trends could not lead to an unsatisfactory situation in future years.

But the recent trend cannot continue indefinitely for the simple reason

that the Bank's Articles of Agreement would not permit it. , ~nless ~me~ded~

Article I I I, Section 3 implies that the Bank's funded debt may not exceed

its total callable capital except in so far as it is used to finance liquid

holdings.!! This impli_cit limit on funded debt is unaffected by the size

of undisbursed commitments or by the possibility of defaults on IBRD loans . •

4. Thus, the rating services or private investors would have

grounds for questioning the security of Bank bonds only if they feared

that the Articles might be amended or if they doubted the value of a

substantial part of the Bank's total callable ·capital. It would _not be

1/ This point is spelled out in para. 87 of the Capital Structure paper.

- 3 -

surprising to encounter fairly serious doubts on the latter point. But the

way of dea 1 i ng with these doubts is not by increasing the Bank's •.•reserve••

ratio. Whether that ratio is 8% or 18% has only a minimal effect on the

risk which bondholders face under the Bank's present Articles.lf A more

a ;:iprop ri a t e V·Jay· of a 11.;:y ing fears about the quality of callable capital

would be to increase the total of callable capital. This is what was done

in 1960 when the Bank was approaching the point at which its funde d debt

would exceed the U.S. callable capital. Such action need not involve

additional paid-in capital.

5. The real significance of the 11 reserve 11 ratio, therefore, is not

that it may be used by the rating services or private investors to ga uge

the security of Bank bonds. To the extent the ratio has any significance

'~·at all, it is in relation to the possibility of a call on shareholders• . .,;

unpaid capital subscriptio~s . If a significant part of 11 reserves 11 were to

be Jost through defaults or to be perceived as being comprom ised through

reschedulings, then the Bank's borrowing program could be adversely affected.

This in turn could provoke a liquidity crisis which might f6rce ~call on

callable capital. While such a scenario is obviously something the share-

holders are anxious to avoid, it could be a matter of concern to bondholders

as well since it could pose thre~t to the marketability of Bank bonds . •

1/ With an 8% ratio, disbursed loans and liquid holdings wi 11 always be at least 2.9 times that part of funded debt which is not covered by 11 relevant 11 callable capital; with ari 18% ratio, the minimum coverage increases to 3.2 times. These figures assume that 70% of to~al callable capital is considered 11 relevant. 11 ~

- 4 -

6. That the Treasury team should single out the 11 reserve•i ratio as

a barometer of the Bank's standing in ~he private capital markets would

seem to reflect either a misunderstanding of the Bank's financial position

(especially, the significance of its callable capital as a source of

security to investors) or at least a very incomplete statement of how their

concerns might be expected to operate in practice. In our final meeting on

February 19th, Bushnell seemed to be shifting his ground somewhat and basing

his concern about the 11 reserve 11 ratio on the need to protect the U.S. from Urtf.

a call on its unpaid subscription. ~

Appropriate Level of 11 Reserve 11 Target

.7. The ability of the Bank to avoid a call on callable capital

f~ ., ..... t'. /( -~~ 1)/. ~ ., ~

arising from loan defaults or reschedulings was explicitly considered in .At

the Capital St[ucture paper (paras. 58-62). The conclusion reached was ·";<

• ;I t~at 11·usable equity equal to 4%-8% of the Bank's disbursed loans--2.5%

to 5% being related to adverse economic or financial developments and

1.5% to 3% as allowance for political risk- ·-<..,ught to be sufficient

protection against losses on loans. 11 The analysis in the Capital Structure

paper did not consider the possibility that partial loss (or compromise) of

11 reserves 11 could damage the Bank 1 s borrowing ability and provoke a

liquidity crisis. This scenario is one of several which is to be examined

in th•e 11Sources and Appl ications 11• study, currently scheduled for completion

in Apri 1. Until this study is completed, it would be premature to say

whether this particular form of liquidity risk can best be dealt with by

increasing the level of usable equity, or increasing liquid holdihgs or by

following some other course of action.

8. Abstracting from the liquidity risk, a level of usable equity

equal to 8% of disbursed loans would appear to be quite sufficient. If

•

- 5 -

the liquidity risk were to be met by increasing the level of usable equity,

then a much higher figure could be justified. Could -the Bank conti~ue to

borrow if half (but no more than half) of its usable eq~ity were lost (or

compromised)? If so, then usable equity equal to 16% of disbur~ed loans

could be defended as a target. The implications of any particular usable

equity target for the "reserve•• target w i 1 1 obviously depend on the existing

levels of reserves and paid-in capital as we 11 as the prospects for additional

usable paid-in . 1 1 I cap1 ta .- The u.s. team would 1 ike us to assume no further

receipts of usable paid-in capita 1 . Operating on this assumptions, the

following table expresses the presently projected level of usable paid-in

capital (~fter the Selective Increase) as a proportion of disbursed loans

for various lending programs: /::-

Usable Paid-In Capit a l/Disbursed Loans

FY80 FY85 FY90

Current Projection 12.5% 6.5% 4.3%

Program "D" 12.5% 7.9% 7. 1%

$5000 m per annum 13.0% 8.3% 7 .·0%

These figures can easily be used to establish a "reserve" target once the

target for total usable equity is set.

Attai·ni_ng ·a "Reserve" Target

9. The impact of various financial policy changes on the Bank's

"reserve" position was summarized in Item #14 given to the U.S. team. A

copy of this is attached fer ease of reference. The principal conclusions

1/ While agreeing that usable equity is a more appropriate basi~ for a target than 11 reserve s 11alone, the Treasury team has nevertheless suggested that we use a 11 rese rve 11 ratio because (assuming no more paid-in capita 1) it will be easier to keep this ratio from declining. This is hardly a sound approach to establishing the Bank's financial policies.

· . . ,

- 6 -

to be drawn from this data--which the U.S. team seemed to accept--~re the

following:

(a) the only measure which has mu~h impact in the short-run

is the cessation of IDA transfers.

(b) boosting the lending rate by .50% has an impact roughly

equivalent to eliminating half the planned growth in

commitments. (We expressed the judgment that,if forced to

choose, the developing countries were likely to

prefer the former course.)

•

I tern 14. Measures to Stabilize the Ratio of

Reserves to Disbursed Loans

• . ··~ - ~, ,

· ·\~~': ·

Attached are two tables which relate to this poini. The first

,•

i n d i cates v a r i o us , p o 1 i c y "packages" vJh i c h v-10 u 1 d b e con s i s t e n t \'I i t h t a r g e t ratios of 8%, 10% and 12%. If u target of 8~ or less \vere to be accepted, no change in current policies or lending progra~ would be required. On the contrary, IDA transfers could be increased in the next fev1 years. A target of 10% would also be consistent with the present lending progran, assuming either that IDA transfers were ~topped or the lending rate were increased by .50%. A· ... target of 12% v1ould require more severe changes. '.lith a cessation of lOA transfers, the target could be attained eith~r by increasing the le.hding rate by .75% or, if this degree of increase v1ere u:1acceptable, by adopting a smaller lending rate increase (.25%) and reducing the planned growth in lending by one-half.

,. ,.

A target of 14% is not practicable in the short-run. It would technically be possible to attain this objective only by large scale sale of loan~ from portfolio in the near futur~, a major reduction in the absolute level of commitments, or a substantial increase in the co~mitnent ·f.ee or other speci a 1 lending charges. Without resorting to neasures such as these, the earliest date a decline in the ratio ca~ be achieved is FY79 at a level of about 13.4~. · This could be done by stopping IDA transfer~, raising the lending rate by 1.0%, holding lending to a constant nonina~

, amount of $5,009 ·million per annum, short ening ~~turities on nc~ lo2~s by ~ ·2 year and grace pe~iods by 1 year, and by shifti~g to an aMortization·

pattern involving eq~:Jal 'repayment .. of. p~·p , L,nc'ip·~:l; ·There must obviously be a q~estion as t6 whether i · dtffer~~ce . as s~all as the cine between 13.4~ and 12% could justify such adde d measures, irrespective of the pos·ition one takes on the a~¢fd~?1~te lev~l of the reserve ~atio.

The timing and relative scale of impact attributable to various~ policy measures are illustrated in the second table. A do\;mvard trend in the average ratio of "reserves" to disbursed loans \<Ji 11 only be · hal ted or reversed \~~en the marginal ratio equals or exceeds the average .. By examining the marginal ratios and in particular the action needed to raise the marginal ratios above the target, it is po~sible to isolate and compare the specific impact of various policy changes. It (s evident, for example, . that cessation of IDA transfers has the largest immediate impact. Increases in the lending rate and reduction in the planned growth of future commit-• . ments have approximately the same time profile. An increase of .SO% in the lending rate has about the same impact as cutting planned future growth in half. 1\ltering the maturities of loans or the amortization pattern only bc~in to have an impact in FY80, though they could be quite important in the later years. . ...

,

.I . .. POll CY ''PACKI\G£ S" COtlS I~ TE!IT ',/1 TU V,\R I OUS TA?.GET RATIOS

OF RESERVES TO D I SBUP.S( D LOf...'IS

)

·" FY77 rY78 . FY79 rv8o FY81 FY82 FY83 FY84 FY85 . • [9' \II th T a rgc t of 8~ • .

Present lending Program No Change in Terms of lo.Jns Continued IDA Transfers

..

.. Excess of Reserves over Target ($m) 1010 # .906 8o5 .: )10 629 545 ~76 415 395

Reserves/Disbursed Loans 14.2% 12.]% 11. 5~ 10.6~ 1o.o:: 9. 5~ 9.1% 8.9% 8.8t

With Target of 10%

. Presenf lending Program No Ch.Jnge in Te·rms of Loans C e s sat i on of IDA Transfers

Excess of Re5erves over Target ($m) 786 718 6~2 565 597 418 349 280 252 .

Reserves/Disbursed Loans 14.8% 13.7% 12. a; 12. 1~ 11.6% 11.1% 10.8; 10.6% W.S%

or

Present Lending Program · lending Rate up by . so;,; ..

. . Continued IDA Transfers

Excess of Reserves over Target ($m) 688 528 372 232 130 ~9 22 137 155

Reserves/Dis~ursed .Loans 1 Ir. 2% 12.]1;, 11.6:; 10.9~ 10.4t 10.1% 10.1% 10.3% 10. 3~~

~ . .;. \oli th Target of 12% ~.--..,...:

w Present · Lending Program . . ~ lending Rate up by ·.75% Cessation of IDA Transfers

... . .. ·- ... '• ......, Excess of Reserves OVt~r

Target ( $m) ~65 345. 225 121 66 40 80 178 397 Reserves/Disbursed Loans 1~.9% ' 13.8% 1).0~ )2.1;;; 12. 25; 12.1% 12.2~ t~. 4% --:·· . 1).. 8~

or

Gro..,.th in Lending Reduced by soz

tending Rate up by .25% C cssat ion of IDA Transfers

Excess of Reserves over Target ( $m) ~66 347 236 120 57 11 10 33 131

Reserves/Disbursed Loans 14.9% 13.8% 13.0% 12.~; 12.2% 12.0~ 12.0~ 12.1% 12. 3~

• p t B

~ .... 2/12/76

. ' .. .

i "

i '.

; .I ~

.. , ·- . . .. . _.._ ..... . ... .. . ._ ...... .. .. _\ . ~ ,..__ ,.. , __,_ .. __ .. __ . , .. .. .... .. . . .. -. -·· ....... ..... . _ .

I

·j I I

t

(j

. '

lfif'ACT OF SELECTED f1 tiAUC I AL POLl CY CHAtiGE S or~ T~EtiD RAT I Q OF "RESERVES" TO OISfJU RSED LOAUS

%

.. FYi7 FY78 FY79 FY80 F"Y81 ~

• Avt:HDt;Jc ~ot I o of "Reserves"

to bis~OJrsed loans 14.2% 12.7% 11.5% 10.6% lO.Ot 9.5% - ( s-l ~ n d a r d -pro j e c t i on "'' i t h Stilet t i ve Increase)

t\atginal Ratio; i.e. Af'lnual lhttcc;se in "Reserves" tompared to Annual lhtfease itl Disbursed

_,.~~a-~_s_

f>tcscnt lending Pto;~r~~'"1 lt.7% . 4.7% 5.2% s:n ·6.1% 6. 3%

(a) \lit'"' ~essat ion of IDA transfers 8.8% 8.1% 8.2% 8.~% 8.7% 8.6%

(b') \lith increase l h lending tete

by .so% ".8t 5.0% 5.8% 6.6% ].6% 8.~%

by l.Ob% ~.8% 5.2% 6.3% 7. 7% 9.2% 10.4~

(t) \li th cessation of lOA ttensfer-s and lending fete up by .50% 8.9% 8.3% 8.7% 9.~% 10.2% 10.7%

~etfuttiofl in Disbursed L·oans

(e) l/2 la:'ihed g rc . .,. th Z..8% 5.2% 6.0% 6.8~ 7.8:2; 8.2~ (b) tohs :;nt at s so ~:. o r.. /yr. lt.9%. 5.6% 6. 8% 8.2% 9·.9% 11.0% (t) tont cnt at $)000 r /y r.

~no ~ortet' rna t v r i t i e:. 'no ester amortizatio!l ~.9% 5.6% 6.8% 9.1% 11.8% 14.1% . .,

.. . ·- .. , .......

•

,

IN

FY83 FY8~ FY8S

9;1% 8.9t 8.8t

6.6% 6.9~ 7.6%

9.0% 9.1% 9.9%

9.Lj% 10.3% 12.0% 12.2% 13.7% 16.Z.%

11.8% 12.5% 1~.3%

9.0% 9.5~ 11.0% 12.8% 13. 9 ~~ 17. 9 5~

17.9% 20. 6~; 31.4%

p t [l

2/12/76 ,.

~

;.

. ..

2/2 1J76

Se 1 ect i ve C<3p ita 1 Increase: Issues Raised by U.S. Treasury Team

Note #3: SUBSIDY ELE MENT IN IBRD LENDING RATE

A. U.S. Perception of the Problem

1. The U.S. Treasury work ing party raised questions about the

lending ra te pol icy on the grounds that it unduly subsid izes borrowers by

failing tofully recover the Bank 1 s cost of l ending operations. Thes e

unrecovered costs are, in the Treasury•s view, of two types: (a) impl icit

costs stemming from Bank shareholders• bearing interest rate and defa ult

risks that should be passed on to borrowers, as indicated by ·an in su fficient

rate of return on shareholders• equity and failure to matc h maturities of

lending and borrowing, and (b) explicit fin an cial costs, evidenced by a

11 negative spread11•

2. Specific;Jl ly, the Treasury staff argued that thP. Bank's lending

rate should be set at a level that would recover the cost of borrowed funds

administrative expenses, and the cost of ca rrying 1 iquidity. Moreover, the.

Treasury staff argued that the Bank's pres en t lending rate pol icy fails to

provide a level of net income sufficient to: (a) increase reserves at the

rate necessary to provide full protection for bondholders' and shar·eholders 1

interest; and (b) provide adequate protection for the Bank against the risk

of interest - rate changes to which it is e~posed because of the mismatch of

maturities in its lending and borrowing.l/

1/ The issue of matching the maturities of borrowing and lending is discussed in Note #2. In principle, the risk to net income of unforeseen changes in interest rates could be covered by -special

· charges to borrowers but in the discussions with the Treasury it was treated as a problem of varying maturities, not risk premiums. ; The sensitivity of the so-ca ll ed 11 full cost 11 lending rate to this risk is quantified in para 12 below.

- 2 -

• 3. The main premise of the Treasury's argument is that the paid-in

/

capital is not provided for the purpose of subsidizing borrowers. Borrowers

are indirectly subsidized by the callable capital which in effect gives them -

a high credit rating and therefore access to finance on terms (maturity and

interest rate) that they could not obtain on their own. The original purpose

of paid~in capital was to provide additional assurance to. bondholders; its

function now is to generate 11 dividends 11 to be used in transfers to IDA.

B. Analysis of the Issue

4. The Treasury position on this issue.focusses on the spread of the

lending rate over the cost of borrowing. A superfi~ial look at the Bank's

past financial performance would tend to confirm the view that the Bank is

subsidizing its borrowers, since the average lending rate on new disburse- ·

ments has been below the interest rate on new borrowing in recent years.

However, this way of looking at the Bank's lending rate may be questioned for

four major reasons:

First, it is not clear that a subsidy free lending rate

is a desirable goal for the Bank.

- Second, the Bank's lending rate is not set on the basis

of a spread over the cost of borrowings but on the basis

of a target net income that takes into account all the

factors affecting the Bank's finances.

-Third, the notional 11 full cost11 lending rate is only mar-

ginally higher- .-30 basis point.s--than the present rate.

Fourth, the spread that is most relevant to the Bank is

the return on earning assets compared to the cost of all

- 3 -

funds used; this has always been positive and is projected

to remain positive.

D~sirabil ity of~ Subsidy-Free Rate

s. Whether the Bank should pursue a policy of charging borrowers the

"full cost" of lending operations is essentially apolitical question, not

a financial one. It depends ma~nly on the willingness of the U.S. and other

Part I countries to provide development finance on a concessional basis.

This issue was addressed in the "Revie\v of IBRD/IDA Program Financial Policies"

(R74-256, December 11, 1974) under the heading of multiple lending rates .

(paras 55-66). That paper concluded that the beneifts from a redistribution

of the lending rate subsidy among borrowers by charging multiple lending

rates would not be worthwhile, since:

6.

- Only 1/6th of the subsidy benefits countries with per capita

incomei above $850.

Graduation of higher income borrowers is a more efficient

way in dealing with the problem.

Benefits to lower income borrowers would be small.

If the U.S. were to insist on a "full-cost" lending rate for all

borrowers, the diff1culties arising from the discriminatory effects of

. mult~ple rates would be reduced, but might be replaced in part by problems ·

arising f~om (a) increased fi .nancial burdens on the poorer countries and

(b) the redistributional issues associated .with transferring larger amounts

of IBRD net income to IDA.

Present Lending Rate Policy

7. The second major point to be made about a "full cost" lending

rate is that it tend to oversimplify a number of important questions about

.·

5 -

changed as a result of excessive or insufficient net income and the bui ·ld-up

in reserves is determined by the behavior of net income rather than as a

specific financial objective. The importance of setting objectives for both _

net income and reserves was pointed out in ''Review of IBRD/IDA Program and

Financial Policies 11 and back-up Note #5 to that paper (copy attached) dis-

cussed · the relationship between these pre- and post-risk targets.

11Full-Cost 11 Lending Rate

10. If, as the Treasury staff requested, the Bank were to follow a

pol icy of. charging borrowers the 11 full cost•• of Bank lending, the lending

rate would need to be set on the basis of the mtal cost of making and ser-

vicing a notional average loan. Such a loan in FY76 would be about $36

mi 11 ion and would have a 20-year final maturity including a 4-year grace

period. The expenses to be recovered under tl1 is approach would include a

proportionate share. of all administrative expenses, interest expense, the

cost of carrying liquidity and a notional charge for risk of loss.

11. In order to recover the total of these expenses from its borrowers,

the IBRD would need to obtain an average spread of its lending rate over the

cost of borrowing of about 55 basis points, i.e. to set its lending rate at

8.80% for an average cost of borrowing of 8.25%. At this rate, the present

value of net income from a notional average IBRD loan would be zero. The

following table shows the present valu~ of net income from such a loan at

different lending rates:

Notional Average IBRD Leana/ Present Value of Net Income­

($000)

Lending rate of: 8.50 8.80 (540)

~/ Discount rate of 8.25%.

;L_Q_Q. 350

2.:1.2. 790

.2..:_2Q 1230

<

- 6 -

12. These figures make allowance for the Bank's nohmal liquidity

policy but assume that the interest rate on borrowed funds does not

change over the life of the loans. Although matching of maturities is

a reasonable assumption · for ~n individual loan within a large portfolio,

complete absence of exposure to interest rate changes would not be. If the

assumption of an 8.25% interest rate were to turn out to be wrong and

the interest rate on half of the debt used to finance the loan were

increased by 50 basis points over the entire 1 ife of the loan, the present

value of net income from the loan would be reduced by about $470,000.1/

Significance of Various 11 Spreads 11

13. . If the Bank were a for-profit institution with private

shareholders, then the Treasury's contention that the 11 negative spread11

(return on new disbursements over the average cost of new borrowing) is

a problem for the Bank might have some validity. For such an institution

this .particular spread would indicate that it was not profitable for its

shareholders as a financial intermediary. For the Bank, however, this

spread is only a rough indicator of the combined effect of its debt-equity

ratio and its lending rate policies. A negative spread simply means that

the Bank is charging its borrowers less than would be required if it were

a commercial institution.

14. Item 18 supplie~ to Mr. Cooper (copy attached) drew attention

to the spread of the return on earning assets over the average cost of

ll This assumes that there is no effect on income from securities i.e. that only long term rates of interest increase.

.••

<

- 7 -

all funds. It is this spread which must remain positive for the Bank to have

a positive net income. This spread declined from 2.77 in FY70 to 2.69 in

FY75 and is projected to decline further to .89 in FY85, at which level it

is expected to remain. The absolute size of the spread is determined by the

Bank's net income target _ relative to the scale of its operations: the spread

wi 11 increase as net income as a percent of gross income increases. For

this reason,~onclusions about the appropriate size of the spread of return

on earning assets overt~ total cost of all funds must be drawn on the

basis of ·the Bank's net income and reserves objectives, not on the spread

itself. Thus, the U.S. concern about the Bank's "negative spread" is for

the most part unwarranted since it is based on application of financial

principles appropriate for commercial institutions to the Bank and because

it focusses on "spread'' rather than income and reserves objectives.

/

\

Attachment 2

•

Item 18 RETURN ON EARNING ASSETS AND RETURN ON LO~NS

VERSUS "ADJUSTED INTEREST RATE'' ON FUNDED DEBT 00. f!/

Return on "Adjusted Interest . f)_i ffe_rencP. Earning '-Re~t urn on Rate'' on Funded Average Coste/ Between Be t.,Jeen · BetvJeen

fiscal Yea r Assets b/ Loans c/ Debt d/ · of all Funds- {1} & (3) {2) & (3) { 1 ) & {4) ( 1 ~· (2) (3) ( ~~)

65 · 5.09 s.61 4.89 2.42 .20

66 5.24 5.63 5.26 2.63 -.02

67 5.61 5.70 5.23 2.68 .38 68 5.63 5.70 5.41 2.86 .22

69 5.88 : . 5.81 6.09 3.33 - ·. 21

70 6.47 5.99 6.50 3.70 -. 03

71 6.68 6. ]l! 7.18 4.23 -.so 72 6.32 6.25 7.39 4.60 -1 .07

73 6.14 6.12 7. t 3 ... ··- -· .. . 4.67 -.99 7/.j 6.63 6.47 7.59 5. 12 ~.96

75 :'\" 7.26 6: 74" 7.93 5.57 -.67 76 " 7.21 6.87 8.25 6.07 -1.04

77 7.~5 . 7.53 8.63 6.60 -1.08

78 7. 77 7.84 f!. 71 6.86 -. 91~

79 7.96 8.09 8.73 7.01 -.77 80 8.11 8.27 8:n 7.14 -.66

81 8. 20 8.36 8.76 ].25 -.56 82 8.29 8.46 8.75 7.36 -.46

83 8.40 8.58 8.80 ·].50 -.40 84 · 8.48 8.66 8.82 7.58 -.34 85 8.51 8.67 8.79 7.62 -.28

· 2_/ Sources : FY6S-67 from Executive Di rectors• Table A.l FY68-85 from Annex Table 2, ''Review ·of ·IBRD Capital Structure," November. 4, 1975. •

£1 Inco~~ from cash and securities p1us income from loans divided by average balance of cash and securities plus average balance of loans disbursed and outstanding.

£! ~~cor.e from loans divided by ave rage balance of loans disbursed and outstanding. £/ Interest expense plus administrative expenses divided by the average balance of

fund =: debt. ~/ Interest Expense plus administrative expenses divided by the average balance of funded

deb~ plus average usable equity.

,

.72

.37

.47

.29

-.28

-.51

-1.04

-1.14

-1.01

-1.12

-1. 19

-1 .38

-1. 10

-.87

-.64

-.so

-.40

-;~9

-.22

·-. 16

-.12 •

p & B t/13/76

2.67

2.61

2.93

2. 77

2.55

2. 77

2.45

1.72 1 .47 .

1. 51

1.69

1. 14 .--.95

.91

.95

.97

.95

.93

.90

.90

.-89

•

2/21/76

Selective Capital Increase: Issues Raised by U.S. Treasury Team

Note #2: IBRD EXPOSURE TO INTEREST RATE INCREASES

A. U.S. Perception of the Problem

~II(<,

1. l f the Bank 1 s cost of. borrowing goes up, its net income may be

adversely affected even if the interest rate on new loans is raised simul-

taneously by the same amount. There are various ways in which this expo-

sure to loss of net income may be dealt with. The Treasury team focussed

on two points (a) the difference between the average 1 ife of loans and

average life of borrowings, and (b) the fact that borrowings to finance

disbursements under a given loan occur considerably after the loan has been

committed. They advocated that consideration be given to passing more of

the risk of interest rate fluctuations onto the borrowers either by narrow-

ing the gap between the average 1 ife of loans and funded debt or by adopting

a lending rate pol icy which would provide for periodic adjustment of the

rate during the disbursement period of each loan.

B. Analysis of the Problem

2. The impact cif an increase in interest rates on the Bank 1 s net

income may be divided into three parts: (a) the increased cost of borrowing

(which is directly proportional to the ~cale of the Bank 1 s. gross borrowings

in the year)J!; (b) the increased interest income (which is directly pro-

potional to the volume of disbursements made under loans committed after the

lending rate has been increased); and (c) the change in income from securi­

tie~ (whi~h wil 1 depend upon a number of factors, including the extent of

1/ More precisely, the increase will be proportional to the volume of new borrowings outstanding. This is the same · as gross borrowings initially, but is net of repayments of new borrowings 1n later years. The same distinction applies to the volume of new loans outstanding, which is net of repayments on new loans.

•

- 2 -

realized capital losses). There wil 1 also be _a secondary impact reflecting

the cumulative reduction in retained earnings arising from the net loss in

income caused by the three primary factors. Assuming continuation of the

present lending rate pol icy, the Bank 1 s exposure to income loss wi 11 only

be lessened to the extent gross borrowings are reduced in relation to dis-

bursements under new loan commitments.

3. Matching Maturitieslf Against this background, it is easy to

appreciate how changes in the average 1 ife of loans or borrowings can affect

the Bank 1 s 11 exposure11 ~ Shortening the average 1 i fe of loans ""i 11 - other

things the same- advance reapyments and hence reduce net borrowing require-

ments in relation to any given level of commitments. Similarly, lengthening

the average life of borrowings will postpone repayments due from the Bank,

thereby lowering borrowing requirements. But it is also clear that single /

figures for the average life of loans or borrowings give a very imprecise I

measure of the Bank 1 s 11 exposure11• Any number of different repayment pro-

files will yield the same figure for average life. Each such profile will

have a different implication for the Bank 1 s borrowing requirements and· hence ·

·a 1 so a different imp 1 i cation for the Bank 1 s 11 exposure11•

4. A simple compar,ison of average lives leaves out of account a

number of other factors which also affect 11 exposure11• This point can be

d~monstrated by imagining two sets of financial projections, each with the

same figures for past and future commitments. In each case the repayment

profiles for loan commitments are the same and borrowings are arranged in

such a way as to yield the same average life of funded debt. The two pro-

jections m~y nevertheless result in very different degrees of 11 exposure11

i·f, for example, there are differences in average disbursement rates,2/

J! 2/

The figure describing the present level and prospective trends in average 1 ives are set forth in I tern #20. (Copy attached) The Bank calculation of the average life of a loan is not affected by the rate at which the loan is disbursed. ?

•

3 -

the level of net income, receipts of paid-in capital or drawings on trans-

fers to IDA.

5. To alter significantly the degree of Bank "exposure•r through

changes in the average 1 ife of new loans or new borrowings could take a

considerable period, depending on how the changes were made. Shifting

some _borrowing from a 12-year maturity to a 20- year mat~rity, for instance,

would alter the average life of funded debt and yet have no effect on Bank

"exposure" for nearly a decade to come. If, as one would expect, longer

maturities were to carry higher intere~t rates, there would be a readily

identifiable cost to obtaining a reduction in "exposure" . .!/ ·The financ ·ial

cost to the Bank of shortening the average life of loans would normally be

less but, for any given level of commitments, it would have the effect of

reducing the Bank's net disbursements to its borrowers. In either case, it

is far from obvious that the cost of reducing_ Bank "exposure" is worth the

lower degree of risk which is thereby achieved.

6. Adjustable Lending Rate The Treasury team's second suggestion

is that the Bank's lending rate be adjusted periodically (say at 6-monthly

intervals) during the disbursement period, so that disbursements in each

period carry an interest rate which is at least as high as the cost of

borrowing during that period. Once this condition was applicable to all

loans being disbursed (which would take several years), it would mean that

an increase in the lending rate would affect not merely the disbursements

under new loans but rather total disbursements. Since total disbursements

are projected to be between 73% and 97% of gross borrowings over the next

1/ Bushnell agreed that the Bank should be willing to pay a premium for longer maturity borrowings because they postpone the costs of carrying liquidity incurred during the three years prior to maturity. A rough calculation of the premium which could be justified in this way for a shift from a 12-year to a 20-year maturity is 2 basis points.

•

- 4

decade (assuming the present program with the Selective Increase), the

ability to adjust the lending rate on all disbursements would give the Bank

the capacity to increase income from loans by the same amount as interest

expenses on borrowings were going up. To completely eliminate net income

variation in the year when the interest rate on borrowin~ goes up would

require an upward adjustment in the lending rate of between 1.03 and 1.37

times the increase in the (single-weighted) average cost of borrowing.l/

]. While the Treasury suggestion certainly would have the effect of

passing more of the risk of interest rate fluctuations onto the borrowers,

it would raise administrative difficulties. If the Bank were to move in

the direction of passing this risk onto borrowers, then it would be desir-

able to consider several alternative mechanisms for adjusting income from

loans. Some 1 imited degree of flexibility in the lending rate on already

disbursed loans (p~rhaps applying only to higher income borrowers) or in

the commitment charge are obvious alternatives. Each mechanism would have

rather different implications for the distribution of risk among borrowers.

Without further study in detail, it is not possible to .say which of these

alternatives is 1 ikely to be preferable.

8. Whether the Bank should move in the direction of . passing more of

the interest rate risk · onto its borrowers is an issue which wil 1 be greatly

influenced by one 1 s judgment about the 1 ikelihood of increasing interest

rates over the next several years. This in turn is closely related to the

prospects for global inflation. Cooper seemed to take th~ position that

greater flexibility in the Bank 1 s lending rate policy would only be necessary

lf This ignores the impact of interest rate changes on the return on liquid holdings.

- 5 -

if inflation and interest rates were to show signs of a renewed and rapid

escalation. He interpreted Item #19 (copy attached) - wnich compared a

si·mple version of the "Treasury plicy" with a simplified version of the

Bank's current pol icy- as demonstrating that "there is not m·uch in it"

if only a modest (100 basis point) rise in rates is the maximum expectation.

Bushnell interpreted the results differently and noted (correctly) that the

full impact of the "Treasury pol icy" is not felt until after 1980.

.. . ,

r ·

I·

I 1, .

•

Attachment

B:tck-Up Note //5

Section 3, para. 23

rrojected VS. Desired IBTID Net Income"

The Board paper cites tHo reasons v7hy tho Eank ~>eeks a sub­stantial net income (para. 23) • . \-One is to guard against· the rlsk of income fluctua t:Lons. vie want I?IO.l cc t ed net income to be ~~275 to $300 million in FY80 in order to have a high probabiJ.ity of actually ex­ceeding $100 million in that year. fut net income i .s also sought so that the Bank may add to retained earnings or transfer fnnds to IDA. These purposes are served only by actually realized ;net income; hence it is an evalua tion of these needs which is relevant 1n determining a desired net income for- the Pank.

The net income projected for a given year need not be the scune as the actual net income desired for addition to retained earriings or transfer to IDA. Suppose, for instance, that further analysis of tho fu.nk 1 s loan portfolio were to establish that IDRD equity -equal to 10% of loans outstanding Hould be sufficient to pro­tect t-he Bank against the risk of loan defaults. Then the income projected on the basis of the policies propos ed in the Ibard paper ·HouJ.d, if attained, imply either 11 excessi ve" accumulation of retaine.d earnings or transfers to IDA (or othe r grants) above $100 million per annum. Qlr re sponse to such a situation should not be to lm-1er the target for projected net income - since that Hould expose tho &nk to m m1acceptable r.Lsk of net income falling below $100 million -but rather to devise ways of disposing · of "excess" net income if and when it is actually earned. Larger IDA transfers would be one way of doing this, though this is presumably not a means v;h.ich Hould have much appeal for our middle and upper income borrOi·Jers o Another alternative Hould be to contribute to an interest st:.bsidization account to help finance a Third vlindoH scheme.

While the net income shmvn in our proj cctions may be higher than 1-1hat is actually needed, the reverse situation is not permissible. If our reserve target -were to increase to 20% of loans outstanding, we 1-1ould have either .to modify the lending program or to increase the net income target above the level required as a buffer against fluctuations. In this case, hm,Iever, th8 neVI and higher: level of net

• income projected 1vould represent a goal ·He actually moan to obtain and not just a target we have set ourselves in order to avoid falling beloH $100 million o Since -Lhe proj e.cti ons clos ely appi'oxjJnatc our best estimate of what is actually expec-ted to happen in the future,Y realized net income is as likely to exceed the proj ec.tion as it is to fall short of ito If it falls short in n particular yea r, the_n the target for subsequent years Hould have to be increas_ed.. Sin1ilnrly, if actual not income exceeds the proj ect:i.on, the target for future · years may be lov1cred. ·

rf vJo remain con~;erva tj_ vc 1-1i th respect to conmri.tmcnt levels, :inflation rates and short-t elm forecasts of income from Gecurl tioc, ,

I I

•

Back-Up Note 115 - 2 ...

!i. As it happens, the to.rget for proj ccted net income which has been chosen for FY.80 ( $2 7.5 to $300 million) is app roxima tcily tho desired net income which the funk Hould need to obtain if it is to meet the 1.5%

· r~se~e target in ~8.5 and mainta~_n . a~1average IDA t1·ansfcr of $100 mllllon over the FY 76. to FY0.5 perlod.- The reconnncnde d policies produce a projected net income in FY85 of about $420 million, v.Jlri.ch is quito close to the nri.nimum which our analysis suggests as a buffer in that year (i.e. ~l~50 million) • Because the net income which is projected is also the net income which is desired, deviations from projected net income have to be made good over time. If next year, for example, 1-re were to fall short of our projected net income, the income targets for subsequent year should in principle be adjusted upHard to make

. up for this deficit in desired income. This would be so evon though the projec·ted net income target for FY80 (required as a buffer) could Hell have decreased in the inter:iJn due to a reduction in risk of fluctuation in administrative expenses or less exposure to the risk of subsequent increases in borrowing costso

5. · In swnmary", then ue may say that our assessment of potential income fluctuations establishe0 a floor for projected net inco!l1e in any given yearo If the desired .net income for that year is below the projected level, then the B:lnk vJOuld have 11 excess 11 income vrhich could be used to supplement IDA transfers or in other ways o · Under these circumstances it would not be necessary to make good the difference betvJeen actual and proj cctcd net income (unless actual net income Has not only less than projected net income but also less than desired net income)o If, 6n the other hand, desired net income is above the minimum required as a buffer, then vle vJould have to aim for the desired level and differences betHeen projected and actual net income would have to be made good over timeo

Of course, the same total of net income over the FY76~FY$) period can be earned in any nwnber of different ways. But if l~ss not income is earned in the early part of the period (i.e. up to FY80), then this Hould have to be c.omp nnso.ted for by hi[;hcr receipts in the later years when the absolute levels of net income are already projected to be uncomfortably high.

,. ,

•

.;. 'In

. 2~0

01/00/73 • 0 1/ 16/'13 • 0 1/23/73 • 01/JO/'/J , 0 .'/06/73 • 021 13/73 • 02/20/73 • 02/27/73 • 03/06173 , 03/I J /73 • 0 3/ 20173 , 03/27/73 •

I. • • l.lr • ~ l , I •• 'IA • II• t. II) d"• :• ,\, . l'•.J 1 l't ald- Rl& 7.10 •t l\IM , 1.991

Yl l:LO..:JPKE.\t\ I FI. I,O 6-Va V FNIJ.A. / ,I n -1, 000 -.) , 000 1 , 00()

Y IFU't l.tV<L FhUA 7. I 0 tlf IJ(C 1997 8 . :!:0 10 . 250 12 , ];,t\

0 4/03/7 3 - ---4-----04/10/73 • 04/17/73 • 0 4/2 4/73 • 05/01/73 • 05/0~/73 • 0 5 /1 5/73 •. 05/22/73 • 05 / 29173 • 06/05173 • 06/1 2/73 • 06/19/73 • 06/26/73 • 07/03/73 - ----0111 0173 • 07/17173 • 01/24/73 • 07/31173 , 08/07/73 • 08/14/73 • 00/21173 •

. 0 8 / 28/73 • 00/04173 • {)9/11/73 • 09/13/73 • 09125/13 • 10 / 0 2/73 ____ __..,.-:...,. __________ ........:,

10/09/73 • 10/16/73 • 10/23/73 • 10/30/73 • 11/06173 • 11 /13173 , II 1 20173 •

, I 1/27/73 , 12/04/73 • 12/11/73 • 12/18/73 • 12/25173 •

14. 250 B

01/01174 ------\-----------·~-~------------01/08174 • 01/1 5/74 • 01/22/74 • 0 1/29/74 •

- 02/05174 • 02/12/14 • 02/19174 • 02 /26174 • 03/05174 • 03/12/74 • 0 3l'19174 , 03/26/74 • 04/02174 ---------,·-------"llll..----:------------04¥09/74 • 0 4/16/14 • 04/23/14 • 04/30/74 • 05/07/14 •

lg~~~~~~: : 05/28/14 • 06/04/74 • 06/11174 • 06/18/74 • 06/25/74 • 07/02/74 ------07/09/74 • 07/16/74 • 0'1/23/74 • 07/30/74 • 08/06174 • 0 811 317, -08/20/74 • 08/27174 • 09/03/74 • 09/10/74 • 09/17/74 • 00/24/74 • 1010 ' 114 ------------+------ -71'--"....._ __________ _ 10/08/74 • 10/1 ,5174 • 10/22/74 • 10/29/ .74 • 11/05114 • 11/1 2/74 • 11/10/74 • 11/26/74 • 12/03/74 • 12/10/74 • 12/17/74 • 12/24/74 • 12/31174 - ·-------la----­ot/07175 • Ol/14/75 • 01/21/75 • 01/28175 • 02/04175 • 02/11/75 • 02/18175 • 02/25/75 • 03/04/75 • OJ/II 1'75 , 03/18175 ~ Ol/25/75 • , 04/01175 --------- ---------~F---......... - ---------

~ .1 n7

~ .1 !> 7 -{) ,l t- 4 -o . I H6 -o.l 8 6 ~.1 29

o . o .. ~ . 00 1 ~.023 -Q ,I 02

-o.036 0 . 0 10 0 . 090 0 , 090 0 . 033 o. o~• · o .on O,N5 0,010

-o . 036 -0. 036

0.011 0 .084

-o.oeo -o.o51 -o . 02 1 -{) ,039 -0 . 0 2 5 -o.I07 0. 12 1 0.267 0 . 3 14 0.241 0,199 0.050 ~.015

0.005

-o.oo5 0, 004 0. 106

0 .049 0.070 0,034 0. 0 10 0 .013 0,065

0.138 0 . 093 0 .150 0 .126

. 0.20t .

0.059 -o.o55 -o.036 -4).084 0.002 0.062 0,099 0 ,191 0.1<'0 ~.004

0.311 0.197 o . 166 0,166 0,1116 0.230 0.059 o.o8a 0.023 0.35 3 0,318 0.259 0,316 0.166 0.171 0.112 0.153 0.374 o.35J o.313 0.445

0.307

0.139 0.139

o.no 0,200 0.319 0.366 0.247 0.243

0,430

0,521 0.212 0.164 0.313 0.1 69 0.170

0.212 0.216 0.203 0,310 0,260 0.320 0.320 0.325

04/08175 • 041'15/75 • 04/22/75 • 04/29175 • 021.9_605_,-05/13/75 • 05/20175 • 05/27175 • 06/03175 • 06/10/75 • 06/17175 • 06/24175 •

• 0.133

07/01175 ----------"'i lg~~~~~~~ : 07/22/75 • 07/29/75 ~ 08/05/75 • 08/12/75 • OBI'IY/75 • 06126175 • 09/021'75 • 09/09/75 • 09/1 6/75 A

. 09/23175 •

,~g~~~~~~ . 10/14/75 • 10/2 1/75 • 10/26/75 • 11/04/75 • 11/11/7~ • 11/1 617!> • 11/7; /75 • 12/0l/7~ • I ?./OY/75 • 12/1 6/75 • 12123/7';; • 12/J0/'1!> - ---01 /tl6/70 • 01 / 13170 • OJ 120116 • 0 11211'16. 02/0)/76 •

PLUT Lf.rJEllll

-· l bnll-F IIMA --.u ... h iV..

ftO~LU a:lM~K SECUtHTY A ~A.LYS JS SY!irl:.'J

PLOT CUI'.:.!AJt • EIIO VR< >Cll O

- -- ··- - - ·- -. - - - o:o91 -

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---------

o.l54

0,118 0.078 ~.02 1 0.055 0 .1 8 3 0.1 16 0.149 0.1 05 0.145 0.135 0.099 0, 133 0 . 046 0 .1 35

-2.022 0 . 219 0 . 273 0.168 0.090 0.130 0 .23 1

Appe' ·:' x I

,; ~'!

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1-. I r !• I ..

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VI [LO LfVEL US11l 6- J/4 Of FEB 11193 6 . 250 ~ . 7>0 1 0 .}~0 12.750 14.250 --- --- ----------------------------

01/09113 • 01/16/7 3 • 0 1/7.3/73 • 011 30/73 • 0 2/ 0 6/73 • 021 13/73 • 02/l()/73 • 02/2 7/73 •

> gj~~~~~~ : : AB

gj~~~~g : . . : AB 04/03/73 -- --------·--------·-----~------ AB 04/I0/7J , 04/17/73 • 04124173 • 0 5/0 1173 • 05/0U/73 , 05115/73 • 0 5/ 22/73 •

~g~~~~~~~ : 06/12173 • 06/19173 • 061 26173 • 07/031/3-07/10/73 • OUI7/7J , 07/24/7J • 07/31/73 , 08/07/D • 08/14/73 •

r g:~~~~ii : 0 9/04173 • 09/11/73. 09118173 • 09/25/73 • 10/02/73 . 10/09173 • 10/16/73 • 10/23173 . • 10/30/73 • 11106173 •

I~ :~1~~~i : 11127/73 • 12/04/73 • 12/11/73 • 12/18/73. 12125/73. 01/01/74 ----4.--------01/0 e/74 •

- Jll /J ';l74 .__ -01122/H • 01/29/74 •

ig~~~~~~: : 02/19/74 • 02/26/14 • 03/05/74 • 03/12174 , 03/19174 • 03/26/74 • 04/02174 ------l.-04/09/74 • 04/16/14 • 04/23174 •

~g~~~~~: : 05/14/74 • 05/21/74 • 05/28/74 • 06/04/H • 06/11/74 • 0 6/18174 • 06125174 • 07/02/74 ---------'\;.,------07/09/74 • 07/16/74 •

lg~~~j~: : 08/06/14 • 08 /1 3 /74 • 08/20/74 • 08/27/74 • 09/0J/74 • 09/10/74 • 09/17/74 • 09/2~ /74 •

: AB

: AB

: AB

: AB

: AB

; AB • AB

: AB • AB

: AB ------

: AB

----AB

10/01174 ---------+-----------""--___,,__ ___ _ I 0/08/74 ,

I :g~~~~~! : 10/29/74 • II /05174 , 11/1 2 /74 • 11/1 9 /74 • 11/26174 • 12/03/74 • 12/10174 • 12/17/74 • 12/24/74 • 12/JI/74 -----r-----

101/07/75 • rol/14175 • 01/21175 • 0112a/75 • 02/04/75 • 02111 175 • 02/1 8 175 • 02/25/75 • OJ/04/75 • 03111175 • 03/18175 • 03/25175 • jg:~g~j~; ~-------~----------04/1 5175 • 04122/75 • 04129175 • 05/06175 • 0 5/1 31'15 • 05/20/75 • 05/27/75 • 0 6/ 0 3175 • 06/1 0/75 • 0 6/1'1175 •

,06/24/75 • • •07/01/75 ------ -----------------..k-------07100/75 • 07/15/75 • 07/22/75 • 07129/75 • 08/05175 • 08/12/75 • 08/IQ/75 , 08/26/75 • 09/02/75 • 09109175 •

,g~j1~~~~ : OV/30175 ---------'') 1 0/0'1/1~ • 1 0/14/7~ • 101] 1/'15. I 0/28/75 , 11/0 d/7:> • 11 /1 1/15 • 11/1 8 /7~ • 11/'.5 /15 • 12/07/75 • I ~/OY/7') •

tl , /1 6/75 . 12/231"15 . • • 1 7/10/7~ ___ _,__ ____ ------------0 1/0617~ . -0 111 1170 • 0 1/20/16 • 01 / 27/7(> . 02/03/76 •

. ~L!IT LrG'. HD

~A IIHI)-USTel ..__ n hi.J A-u:> rn ...-. c u:... ru

\'Hl~LI) !.! AU K !.tl(.'U .l l f)'. ' NAl Y:i l S ~v ·lt:M

rwr to~mm

A

B

c

O. J<'<> o. 3\_t O. Jo O. JJ~ O. X>.J 0 . :3->7 0.41!.!< 0 .4J"I I 0.44~ 0.421'

0.548 0 . 55 .. o . 5<~5c o .5ro o.57Z 0.514 0 , 4 55 0.455 0.40 7 0 .407 0 . 365 0.401 0. 507 0 . 485 0.40-4 0 , 43<> 0 .46 7

0.253 0.304 0 . 546 0.64S o. 717 o. 700 0.567 0 .515 0.565 0.485

0 .377 0,385 0.538

O,HO 0.526 0 .455 0,474 0.501 o.55•

0.525

-0.572 0.578 0.631

0.504 0 .379 0.430 0,324 0.426 0.437 0.44-4 0.5119 0 .498 0 . 289 0 . 610 0.592 0.-481 0 .503 0 . 503 0 .668 0 . 468 0.528 0.526 0.683 0 . 846 0 , 989 0.932 o. 790 0.603 o. 718 0. 699 1.005 1.111 1.007 1,184

1.090

0. 873 0 .954

0.886 0.931 1. 0 42 1.110 I .024 1.041 I . 059

1.105 0.829 0 .836 0,911 o. 769 o. 7J5

o. 703 o. 721 0,668 0.687 0 .654 o. 735 o. 780 g_, 7? 4_

0 . 67 1 0 . 688

. o.e6o

o. 756 0 . 688 0.657 0 . 80 2 0 . 930 0. 0 34 0.824 0. 888 0.817 0 .930 0.975 0.893 o. 76 1 0.836

o. 724 0 .63 9 0 .62'1 0.462 0 . 62 6 o. 774

o. 7• 2 o. 709 o . eo~ O.H7J 0 . 6')0 0 . 14 4 () .t\.¢4 t) . 1!.afl D. 7'>0 0 . 830 0 . 19 1 0 . 0~2

A ndix II

I

I I l [. r

-I

/

i

.... ~ .

I '

•

') 1~1lD b l/ .. '1 Ju J;&n, Jll"o .. . ~~ ,,JO d:Jc. , h l 'i1t'

T lil..!) - },..MA fl • .,kl'C du• X.,.n:h L'Jl7

'l t:L •, ,il A•> t•.:: J1) <"-I I',: V,.., \A .... .. ~ ... - 2 . 0'l0 - l. \)i)l1 - , • • ,. l, l'\.._ .)

' 'll;Lt-' Lt..'t'L L ~"' · ' "• ' ~ . J·l o.- .tA£~C~~ 1-:.'77 6 . 0flll '1. ("1{'1(1 10 . oor' I' · ("l(lt)

----~-- ------~----0 1/09 /73 • 0 1/1 6/73 • OI /2J /7J , 01/J0 /73 • 02/06/73 • 02/131'73 • 0 ?120/13 • 0 2 /27173 • 03/06/73 • 0 3/1 3173 • 031 20173 • 03/21113 • 04/03173 -------04/1 0 /73 • 041 11173 • 0 4/ 24/73 • 0~10 1173 • 05/ 0 d/73 • 0~/1 ~1'73 • 05122/73 • 05/29,(73 • 06/051'73 • 0 6/1 2/73 • 06/19,(73 • 06126173 • 01/03173 ----------=,----------------------...-= 07/10113 • 07111173 • 01124113 • 0113 1113 • 08101113 • 08/14173 • 08/2 1173 • 08/28/73 • . 09/0 U7J , 09111113. 09/1 0 /73 • 09/25173 • 10/021'73 -------+--------------­I0/09/7l • 10/16173 • 10/23173 • 10/30173 • 11/06173 • 11/13173 • 11/20/73 • 11/27173 • 12/04/73 • 12111173 • 12118173 • 1212517.3 •

2 , 11"0

14. 000

01/0 1174 -------·t---------------------:::-..,::_ __________________ _ 01/08/74 • 01/15174 • 0-1122714-: ­Ol/29174 • 02105/74 • 02112174 • 02/19/74 • 02126114 • 03/05174 • 03/12174 • 03/19174 •

. 03/26174 • 04/02174 -------------~.,-------------.::!IIOI ... ~~~~r;;::.----------------''--------04/09/74 •

'()4/16174 • 04/23174 • 04/30/74 • 0 5/07/74 • 05/14/74 • 05/21174 • 05/28174 • 06/04/74 •

.g~~:~~~! : 06125174 •

.........

0 7/02/74 ---------·-----------=~.-------~-... l!!l~:::-----------------07109/74 • 0111 6114 • 07/23/74 • 07/30/74 • 08/061'74 • 08/13174 • 08/20174 • 08127174 • 09/03174 • 09/10174 • 09/17174 • 09/24/74 • 10/01/74 ----------------------"---------------.I~-------------­I0/08/74 • 10/15174 • 10/22174 • . I0/29174 • 11/05174 • 11/12174 • 11/19/74 • 11/26174 .. 12/03/74 • 12/10174 • 12/17174 • 12/24/74 • 12/31/74 --------"·--------------------•::-----------------------OI/07/75 • 01/14/75 • 01/21175 • 01/28 175 • 02/04175 • 02/11175 • .

,0211 8 /75 • 02125175 • . 03104175 • 03/11175 • 03/1 8175 • 03/25175 • 04101175 --------~""""'----·----------· ..... ~~ 04/08175 • 04/15/7S • 04/22/7S •

. 0-4/29/75 • 05/06/75 • 05/1 .3/75 • 0 5/20175 • 05/27175 • 06/0J/75 • 06/1017~ • 06/17175 • 06124 1'/5 • 07/01175 ----------''k 07/0d/15 • 07/1 5 175 • 07122/75 • 07/29175 •

.08/05/75 • 08/12175 • 0 6/J 9175 • 06126115 • 09/ 02175 • 09/09/ 75 • 09/16175 • 09/23175 • 09130175 -----------1 0/0717~ • 10/14175 • 10/21175 • I0/2tll75 • 11/0417~ • 11/1117~ • 11/l d/75 • 11/251 75 0

12/02/75 • 12/09175 • 12/1 6175 •

: ~~~~~~ _. ----..C::~·--.:_---c!ll ...... lli!!!!!~~~=

r PLOT LEOENO

~ ! BnD-FIIMA - u FNMA

lfllHLD BAI< K SECIJH !TY AIIAl.YS IS SYSTE~

PLOT Ctll.f.llAIIO

\

O.l e<-O . f'..:~ , , ('?7

- .. 0-4:lo - n. cOJ -o . 2:8

0 . 3€6 0 . 206 0 . 206

. <'96 -o. 7S -o. on -o . .... 2 -{) , 00 2

Q. Q36 0 . 037 O. OJS

-o. 03tl , QC\ 1

-o.075 -o. OJ6 - 0 . 036 -o. 0 35

0 . 5<'9 0 . 574 0 . 260 0 .1 99 0 , 300 0. 137

-o . oso -o.217 -<>.I 61 0.578 0.670 0.639 0. 608 0 •. 016

0.205 0.25 2 0.256

0.004 0.006 0.143 0 .235 0.262 0.660

0.280 0.102

0.116 0.600

0.560 0.371 0.137 0.193 0.253 0.095 0.342 0.417

. 0.642 0.-493 0,351 0.216 0,335 0.179 0.299 0,253 0 • .381 0.144 0.303 0.723 1,0.11 0.962 0.986 0.678 0.348 0.625 0.649

0.919 o. 778

0.606

0.110 0.417

0.261 0.534 0.4-40 0,455 0,669 0.441 0.458 0.413 0.561 0.579

-o . 08 1 -o .OI6 0,317 0.107 0.309

0.390 0.243 0.408 o.l40

-o .230 0.!)51 0.217

_:<).26 7

-o. 126 -o. 0 79

o .2e6 0.308 0.405

-o.soo -o . 271 -o.6n -o • .359 -o . oo6 -o.o65 -o.217 -o. 089 0.055 0 .40 5

-o. 347 -o . 4 ... ,0 -<1.597 -o.75 7 -o .6n -o.IP.B -'1.307 -o.493 -{).531 --{) . 722

o . 279

-o. 06.C -o.081

0 , 038 -{) , ()1)2

().4 !: 1 o. n• .s

-o . 64l

Ap · i=-. III

i-1

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l.Ji,;..'l) 6-l/2~ tlo.• Ju ~ 1?76 n J._ Tl «>-lll.S n.. . I b. 19"/0 nlll 6. - nw, ~~~ 1!'77 n U.Jtk bo-VU J~u 1•b• l !H6 Tlold - u.•ta 6--l.IU ot Tob. 1976

-2 .000

-2.000

6.000

, 01/09/73 • 01/16/73 • 01/23/73 • 01/30/73 • 02/00/73 • 02/1 3/73 • 02/20/H • 02/27/73 • 0 3/06/73 • 03/13/73 • OJ/20/73 • 03/27/73 •

-1.000

.:.1. 000

8.000

YlE LOSPnEAU I B»> 6-1/2 V U TR 6-i /4 ~. 000

Yl CLOSPI<EAD Fm<A 6 .311 V USTR o- 1/4 -{) . 000

YI ELD LEVEL USTk 6- 1/4 oi' FEB 1976 10. 000 ---------------·

1.000

1. 000

12 . 000

2 . 1JOO A

2 . 000 . 8

14.000 c

. 04103)73 ----~·-:-----------A---..,.--------------'04/10/73 • 04/17/Tl •

g;~:~~~ : . \ 05/08/73 • 05/15/73 • 05/221'73 • 05/29/73 • 06/0S/73 • 061121'13 • 00/19/73 •

tg~~~~~~ -----"~ 07/10/73 • 07/17/73 • 07/24/73 • 07/JI/73 • . 08 /07/73 • 06/14/73 • 08/21/73 • 08/28/73 • 0 9 /04/73 • 09/11/73. 09/18/73 •

. ' 09/25/73 • 10/02/73 ----~------------10/09/73 •

. 10/10/73 • 10/2~/73 • 10/30/73 • 11106/13 • 11/13/73 · . 11/20/73 • 11/27/73 • 12104/73 • 12111/73 •

112/18/73 • -12/25/73 • 01/01/74 ----'~---------....,---------#- - -==-.-.""--------­. 01 76'8714~ - - - .. 01/15/74 • 01/22/74 • 01/29/74 • 02/05/74 • 02/12/74 • 02/19/74 • 02/26/74 • 03/05/74 •

• 03/12/74 • 03/19/74 • OJ/26/74 •

~ 04/02/74 -------""'·--------JIF-=ol1lillllo=:----------04/09/74 • 04/16/74 • 04/23/74 • 04/.30/74 • 05/07/74 • 05/14/74 • 05/21/74 • 05/28/74 • 06/04/74 • 06/11/74 .: 06/18/74 • 00/25/74 • 071'()2/74 -----------t..,-.-----07/09/74 • 07/16/74 • 07/23/74 • 07/.30/74 • 08/06/74 • 08/13/74 • 08/20/74 •

. 08/27/74 • 09/03/74 • 09/10/74 • 09/17/74 • 09/24/74 • 10/0I/74 ------------+--------------Jr:;_----:c:::lliP "--­I0/08/74 • 10/15/74 • 10/22/74 •• 10/29/74 • I 1/05/74 • 11/12/74. 11/19/74. l 1/26/74 • 12/0l/74 • 12/10/74 • 12/17/74 .. 12/24/74 • 12/31/74 -----~-----:---------~..:---7..1~-----· 01/07/75 .' 01/14/75 • 01/21/15 • 01/28/75 • 02/04/75 • 02/11/75 • 02118/75 02/25/75 • 03/04/75 • OJ/I 1/75 • OJ/18/75 •

·03/25/75 • 04/01/75 --+ooo::::--------------­_Q~/'()B/75_ ....__ 04/15/75 • 04/22/75 • 04/29/75 • 05/06/75 • 05/13/75 • 05/20(75 • 05/27/75 • 06/03/75 • 0 6/10/75 • o6i.l7/75 • 06/24/TS • 07/01/75--07/08/75 • 07/15/75 •

1 g~~~~~~~ : 06/05/75 • 08/121'75 • 08/19/75 • 06/26/75 • 09/021'75 • 09/09/75 • 09/16/15 • 09/2 3/75 • 09/30/75 -----~ 10 / 0 7/75 • 10/14/75 • 10/}1/75 10/20/75 • 1' /04/75 11/11/75 11/IU/75 II /25/7~ 12/02/75 12/09/75 • I ?/ 16/75 • 12/23/75 • 1 2/30/7~

PLUT LLGUIO --A I ~IHHJ~Tll .-_.) I'<IIIA-ti~T1 - c u~rn

W<ni LO UA IIK S~CURITY AI"LY!ilS SY5TE~

~urr cowwm

: AB

0 .409

0.319 0.135

-o.ooa

0.364 o.33~ o.339 'l.IJ8 0 .191

-{).162 0.412 0.315 0 .241 0.291

11.394 0.217 0.217 0.164 0.217 o. 794 0.092 0.427 0.404 0.612 0.250 0.168

-{),092 0.438 O.!i18 1.055 1.0~4 0.1107 1. 265 1.25 7 0.858

o. 708 o.n2 o. 777

0.133 0.491 0.665 0.654 0.835 1.208

0.528 0.532 0.601 1.149

1,087-0.845 0.609 0.693 0.598

' 0.322 0.469 0.699 0.981 o. 71 I 0.445 0.338 0.622 ' 0.457 o. 161

. o. 760 0.041 o.6n 0.646 1.305 1.479 1.57t 1.631 1.212 1.399 1.427 1.491 .

I .968. I. 704

1.441_

0.973 1.109

0.916 1.144 0.923 1.002 . 1.111 0.868 0.718 . o. 734

0.514

1.:!39 0.874 1.181

0.916 0.846 1.019 0.89.1" 0.665 0.919 'i.f7j . 0.619

0.938 1.022 I .333 1.187 I .:J:l5 0.442 0.35 2 0.085 0. 252 o. 760 0.631 0.1 6 4 0.576 o. 745 1.068 0.605 o.JOl 0.107 0.1138 o.SU5 o. 786 o. 753 o. 795 o. 732 0.943 1. 4UO

1.11 8 1. 7..15 I. JU? I. 434 1.539 0. 1>?3 0.204

Appe X IV

I·

!'

l I··

I

.·

/

·, ,

' · . ...

.: '

~·

.. ·~

.,. ,.· ~ ... ~ ... __ .._.................,..

APPENDIX V

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Estilr.Ated Yield SPread:-l~kets on in basi s points)

Qi'ferir.g Mooey's/ Offerin~ Tel"l!l3 Date of Pricins ~ Issuer Amount

~ Maturity · S&P' s Ratings Call Protection ~ Yi eld ~ Yield (A)* (B)~" ---roooJ -- --1/14/65 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT $200,00< 4 1/~ 2/1/90 Aae./AAA NC ·- - 10 Yrs. 100.375 4.475 - - + 2~

12/3/64 Pacific Nortrrllest Bell Telephone Co. 50,0()( .:.; 1/2 12/1/2000 Aae./AAA . NC - 5 Yrs. 101.25 4.43 101 3/4 4.39 + 16 +9 7/8/64 Balt imore Gas & Electr;l.c Co. .30,00 4 1/2 . 7/15/94 Aae./AAA NRF- 5 Yrs. 101.75 4.394 101 1/4 4.43 + 20 12/2/64 Pacific Gas & Electric Co. 65,00l 4- 1/2 12/l/96 Aa/AA NRF- 5 Yrs. 100.00 4.50 101 l/2 4.41 + 18 1/24/62 International Bank for Reconstruction and Development 100,00 ~ 1/2 2/1/82 Aae./AAA NC - ·10 Yrs. 100.00 4.50 100 1/4 4.48 + 25

. U, S. Treasury 4 1/4 8/15/92 100.8 4.23 '

6/28/66 JNTERMTIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 175 ,00<' 5 3/8 7/1/91 AB.e./AAA · NC - · ).0 Yrs. 99-75 5.393 - - +68

4/28/66 Chesapeak~XZc Potomac Telephone Co. 50,00< 5 1/4 5/1/2005 AB.e./AAA NC - <" 5 Yrs, 101.50 5.16 98 1/4 5.37 +66 +2 5/4/66 Weyerhaeuser Co. 150,0()( 5.20 5/1/91 Aa/AA NRF- 10 Yrs. 100.00 5.20 99 1/2 5.24 +53 5/12/66 Southern California Edison Co. 75 ,O<X 5 1/4 5/15/91 Aa/AA ' NRF- 5 Yrs. 100.00 5.25 98 1/2 5.36 +65 2/9/oo International Bank for Reconstruction and Development . 125,00 5 2/15/85 Aa.a/~ NC - 10 Yrs. 100.00 5.00 97 1/2 5.21 +~

u.s. Treasury 4 1/4 8/15/92 93.4 4.71

3/14/67 TiiT.r..Rl:ATI O!lAL BANK FOR P.ECONSTRUCTICN AND DEVELO~'T 250,00< 5 3/8 4/1/92 Aae./AAA NC - 10 Yrs. 100.375 . .5.348 - - +78

3/1/67 Chesapeake & PotOI;lB.c Tel('phone Co. of Va. 65,00C ~ 5/8 3/1/2007 ~~/AAA NC - 5 Yrs. 101.20 5.55 102 1/2 5.47 +90 (-12) 3/8/67 Shell Oil Co. .150,00C 5.30 3/15/92 Aae./AAA NRF- 10 Yrs. 99-75 5.32 100 5/8 5.26 +69 2/8/67 Virginia Electric and Power co: 50,00. 5 1/8 2/1/97 Aa/AA NRF- 5 Yrs. 100.25 5.11 97 1/8 5.32 +75 6/28/66 Intcrnatio:l.e.l Bank for Reconstruction and Development 175,00C 5 3/8 7/1/91 Aaa/AAA NC - 10 Yrs. 99.75 5.393 100,00 5.375 +81

u.s. Treasury ~ 1/4 8/15/92 95.28 4.57

8/22/67 Th'TER!\ATIO:W.L, oonc FOR RECONSTRUCTIOO AND DEVELOPMENT 150,0()( 5 7/8 9/l/93 Aae./AAA NC - 10: Yrs. 99.00 5.95 - - +81

8/1/67 ~erican Tel. & Tel. Co.. . 250,00C 5 8/1/2000 Aae./AAA NC - 5 Yrs. 100.718 5.95 100 3/8 5.97 +83 (-2) 8/8/67 StanCa.rd Oil Co. of Califo~ia 200,00< 5 3/4 8/1/92 Aae./AAA NRF- 10 Yrs. 98.69 5.85 98 1/2 5.87 jj 5/9(67 Southern California Edison Co, 8o,ooc 5 7/8 . 5/15/92 Aa/AA NR - 5 Yrs. 101.248 5.78 98 3/4 5.97 3;'1 /67 L•terne.tional Bank for Reconstruction and Developnent 150,00C 5 3/8 4/1/92 Aae./AAA NC - 10 Yrs. 100.375 5.35 93 1/2 5.88 +74-

U.S . Treasury 4 1/4 8/15/92 ·87 1/2 5.14

. 3/31/ £13 INTERNATI ONAL BArTl< FOR RECONSTRUCTION AND DEVELO:PME:IT · 150,00C 5 1/2 3/15/94 Aae./AAA NC - 12 1/2 Yrs. 99.50 6.54 - - +94

2/7/68 Hichigan Bell Telephone Co. 125,00C 6 3/8 2/1/2005 · Aae./AAA NC - 5 Yrs. 100.783 6.32 97 7/8 6.53 . +93 +1 2/16/68 International Harvester Co. 50,00C 6 1/4 3/1/98 Aa/A NRF- 10 Yrs. 100.00 6.25 99 3/8 6.30 ----:_ •. +70 3/ll/68 Philadelp!'lia. Electric Co . 6o,ooc 6 1/2 3/1/93 Aae./AAA NRF- 5 Yrs. 100.00 6.50 100.00 6~ 50 +90 8/22/67 Intern.atior.a.l. Bank for Reconstruction and Development 150,0<X 5 7/8 9/1/93 Aae./AAA NC - 10 Yrs. 99.00 5.95 93.00 /~.44 +8.4

u.s. Treasury 4 1/8 5/15/94 Bo.oo

9/17/68 INTERllAl'ICNAL BANK FOR RECONSTRUCTICN AND DEVELOrnENT 250,00C . 6 3/8 •. 10/1/94 Aae./AAA NC - 12 l/2 Yrs. 99.25 6.435

8/13/W Wisconsin Telephone & Telegraph Co. 50,00C 1/4 8/1/2oo4 Aae./AM NC - 5 Yrs. 100.00 6.25 9(:)1./.1~\ ~~39-w- ~ +W~I +5

M~M~ Standard Oil Co. (New Jersey) # .. , 250,00C 1/2 7/15/98 Aaa/AA.a. NRF- 10 Yrs. 100.00 6.50 Wisconsin Power & Lig.'l t Co. 25,00C 1/4 8/1/98 Aa./AA NRF- 5 Yrs. 100.00 6.2,

3/31/(;8 International Bank For Reconstruction and Development 15o,ooc 1/2 ' 3/15/94 Aaa/AAA NC - 12 1/2 Yrs. 99.50 6.5

U, S • Treasury 86 5.30

; .. ~ j''.,.~ '.f.,. .,.

':~

f I;>

Offering ~

7/23/70

/21/70 6/2x70 7/7 70 9/17/58

8/ll/71

8/3/71 . 7/22/71 ·7/20/71 7/15/.71 5/26/p

i2/9/75

12/9/75 10129174 4/10/75 6/4/74 7/23/70

Column (A):

Column (B):

2/4/76

I_~

lNTERNATICNAL. B ~.NK FOR RECONSTRUCTION AND Dl:."VELOPMENT

Moody's · Issuer Amount Fate Maturity S&P' s Rating!

"lOOOJ --

Th'TEIDIATIONAL MNX FOR RECC!fSTRUCTION AND DEVELOPMENT $200,000 8 5/81> 8/1/95 Aaa/AAA

Bell Telephone Co. of Pennsylvania 100,000 8 5/8 7/1/2000 Aaa./MA General Foods Corp. 75,000 8 7/8 7/1/90 Aa/AAA Consolidated Natural Gas Co. 40,000 9 7/1/95 Aa/AA International. Eank for Reconstruction and Developnent 250,000 6 3/8 10/l/94 Aaa./AAA . U.S. Treasury 4 1/4 8/15/92

:INTI:~~IONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 175,000 8 1/8 8/1/96 Aaa./AAA

Indie..T1B. Bell Telepho~e Co. 100,000 8 1/8 8/l/20ll Aaa./AAA FliJltkote Ccmpany 40,000 8 1/4 7/15/96 A/A · C=nwealth Edison Co.

. 100,000 8 8/1/2001 Aaa/AAA Columbia Broadcasting System, Inc. 50,000 7.85 8/1/2001 Aa/A Stauffer Chemical. Company 66,000 8 1/8 6/1/96 A/A .

U.s . Trec.sury 4 1/4 8/15/92 -

Th'TE'RNATIONAL BANK FOR RECONSTRUCTION~ DEVELOPMENT 250,000 9-35 .. AaaiAAA

Chesa?eake & Potomac Telephone Co. 100,000 9 1/4 12/15/2015 AAAIAAA

Continental Oil 150,000 9 1/8 1111/99 AaiM

An.l-Jeuser Busch 150,000 9.20 4/i/2005 Aa'IM

Glv!AC 250,000 . 8 7/8 6/1'199 Ae.a/M International Bank for Reconstruction and Development 200,000 8 5/8 8/1/95 Aaa/AAA

' 8 1/4 5/15/90 U. S. Treasury

Yield spread bet ween obligations listed (at new offering or ml rtet yields) and U.S. Treasury bonds, at about the time of various IBRD offerings . . .

Yield spread between IBRD bond offering terms and market yieltds of AT&T system obligations (at or about the time of IBRD offerings) .

' ":-,.

Call. Protection

NC - 12 1/2 Yrs.

NC - 5 Yrs. NRF- 10 Yrs. NRF- 5 Yrs. NC - 12 1/2 Yrs.

<-NC - 12 1/2 Yrs.

NC - 5 Yrs. NRF- 10 Yrs • . NilF - 5 Yrs. NRF- 10 Yrs. NRF- 10 Yrs.

-NC - 12 112 Yrs .

NC - · 5 Yrs NRF- 10 Yrs NRF- , 10 Yrs NC- '10 Yrs NC- 12 1/ 2 Yrs .

APPENDIX V Page 2

Estimated t-arkets on

orrerins Terms Date of Pric~ ~ ~ ~ ~

100.00 8.625 - -·100.397 8.50 Snyd. 8.50

99.50 8.92 103 3/4 8.48 101.00 8.90 102 1/4 8.77

99.25 6.43 79 8.42

69.24 6.94

100.00 8.125

99.122 8.20 100 1/8 8.11 100.00 8.25 100 1/8 8.24 100.568 7.95 99 1/2 8.d+ 100.00 7.85 99 1/8 7.9'3

99.00 8.22 100 1/8 8.11

- - 74 1/2 6.4$ ..

100.00 9·35

99 00 9.3"' 9.36 99 75 9·15 9 -lb

100.00 9-20 9.10 99 .625 8.91· 9·19

100.00 8.625 9.U

8.4l

.. .

_.

~ ' . . .;_

Yield Spread~ i · n basil' points)

(A) * * (B)

+-169

4-156 +-154

+12

+-18~ ~lS

H64-

: +162 • +175

+2

~ +15~ +-14-4

•, H62

~ 94

~ 74

"' 73 +-69 "' 78 "' 77

(I

1.

Selective Capital Increase: Issues Raised by U.S. Treasury Team

Note #4: YIELD SPREAD ON IBRD BONDS

2/20/76

This issue was not discussed at length with the Treasury

Mr. Cooper was given a copy of Mr. Rotberg 1s note on yield spreads. (A

copy of this note is attached for ease of reference.)

2. Following up on this note, Treasurer 1 s Department has undertaken

a more extensive study~ Monthly market price data now has been c611ected

for seven sets of long term World. Bank, United States Treasury and

American Telephone securities over a ten year period commencing January

1965. These data wi 11 be converted into yield spreads among the three

categories which wi 11 then be subjected to the following statistical

analysis:

(a) A detailed statistical description of the yield spreads

between the three categories. This description wi 11

include:

mean

standar~ deviation

trend line over time

graph of the time series.

(b) A multiple regression analysis will be used to d~termine

the factors which contribute to a change in the yield

spread from time to time. For this purpose the following

variables have been identified:

, ,

'. ~ ..

- 2 -

the nominal rate of interest

the relative supply of U.S. Treasury securities

and other close substitutes of World Bank bonds

the amount of outstanding World Bank obligations

in the market

the time to maturity of the issues in the yield

spread pair.

The analysis described under (a) wil 1 be performed in the week

ending February 27. The results of that study will be used to refine the

hypothesis of the multiple regression analysis outlined under (b).

Attachments

•