Empirical Study On Issue Pricing Of Medium Term Note (MTN)

Medium-term notes (MTN) originated from the United States in the 1970s, initially as a financing tool lied between commercial paper with short-term and corporate bonds with long-term. MTNs in the domestic market, launched in April 2008, after rapid development for three years time, had become an important part of inter-bank bond market. Domestic MTN make institutional arrangements with reference to the U.S. market. The way for issue management is Shelf Registration rather than approval system and the way for issue pricing is Book Building rather than bidding. Under the current issuing institution, to determine the factors impact on the issue pricing for MTNs makes sense that we can obtain more rational pricing for MTNs, and help institutional investors determining the investment value of MTNs to choose correct variety and timing.To make it, we use the methods of theoretical analysis and empirical validation to study the factors impacting on issue pricing of MTNs. We made it as followed:Firstly, We defined the concepts of MTNs and the issue pricing. MTNs is essentially a medium-term debentures, issued by non-financial companies with legal personality in the interbank market. MTNs were issued by parity. According to the principle of fixed income securities pricing, pricing a bond with parity is essentially determining its’coupon rate which is also yield to maturity on issue day. Therefore, the scope of this study is defined as primary market pricing of interest rates or spreads on MTNs.Secondly, to determine the theoretical factors affecting on issue pricing of MTNs, this paper reviews the domestic and foreign research on credit spreads and issue pricing of MTNs. Then we learn the merits of the existing literature to provide reference for our theoretical analysis.Thirdly, based on the literature review, combined with characteristics of MTN issuance market and pricing system, the paper summarized in theory the influencing factors of issue pricing of MTNs and made a preliminary statistical analysis.Finally, an empirical model was built to verify the influencing factors of MTNs pricing. Empirical findings show that the credit rating of issuers, MTN term, secondary market turnover, inter-bank market repo rate, industry differences, issue size have significant impact on pricing of MTNs, while the reputation of underwriters, corporate nature of issuer and its financial indicators have no significant impact on issue pricing.In this paper, there are two points worthy of recognition. Firstly, this study collected a large number of original data of MTNs to summarize the issue market of MTNs, which made some progress compared with other study. Secondly, the paper did not use the traditional bond yields as pricing benchmark, while take lending rate as the benchmark interest rate. This method was different with most of the existing literature.The paper has two shortcomings in research and should be further promoted. The first problem is the selection of benchmark rate, in the current situation, for MTNs issuing coupon rate the most valuable reference guide interest is the interest released by National Association of Financial Market Institutional Investors (NAFMII). This approach takes into account the market differences between domestic primary market and secondary market the reality of dual track interest system. So in the empirical modeling reference guide interest rate has not been taken as the benchmark interest rate, while taking lending rate with the same period as the reference.The second problem is the selection of explanatory variables. The paper selected some factors related to the MTN itself such as credit ratings, circulation, term, industry and so on. However, from the literature review and theoretical analysis of the situation, the systemic factors do have significant impacts on issue pricing of medium-term notes such as economic growth and inflation. However, the macroeconomic data are monthly data. If this paper take monthly data as the sample data, the sample data will be too short. Thus, while the theoretical analysis test verified these macro-factors’impact on issue spreads of MTNs, the empirical analysis does not take these factors into the model. As the length of the data of MTNs issued increase, future research may consider take monthly data into model as explanatory variables, to take macroeconomic factors into account with the study.