Pricing And Credit Analysis Of Chinese Municipal Bonds Based On Black-Karasinski Mode

After the international financial crisis in2008, Chinese municipal bonds (Local Infrastructure Company’s debts) have been walking through a channel of rapid expansion, and those bonds are one kind of local governments’ funds resources. It was obvious of local governments’credit risk in2010, thus central government strengthened the control of Chinese municipal bonds’volume, and it surely worked. But in subsequent2012, the volume and explosive growth ratio of Chinese municipal bonds was impressive. Especially after August, the average volume of new Chinese municipal bonds was almost130billion. And until the end of2012, there were848Chinese municipal bonds issued, the total volume of the year was1001.5billion, thus the all existing Chinese municipal bonds across China was over2000billion. Comparing to2011, the growth ratio of Chinese municipal bonds volume issued in2012was124%, and the ratio was the highest around all other kinds of bonds. However, the Chinese municipal bonds we talk about is not the same sort of bonds as in advanced countries such as America, since there is no law can proof that local governments are responsible for the local infrastructure company’s debts. Also, according to National Government Debt Report issued by National Audit Office of the People’s Republic of China in June2013, only20%of Chinese municipal bonds can be treat as local governments’debts. As we can see, the credit agencies’credit rates of Chinese municipal bonds are mainly very good. Considering all the evidences, there is possibility that we may overvalue the Chinese municipal bonds.It is known to all of us that accurate interest term structure is crucial for valuing bonds, so if we want to know whether a bond is correctly valued we should find a practical interest term structure. Nowadays, the central bank has given the commercial banks the right to decide the loaning rate by themselves, there is no limit of loaning rate any more. And according to the central bank’s report recently, the deposit rates will be market oriented in one or two years. The all market oriented interest is getting close, and our study about interest term structure is relatively slow. This article is about to use Black-Karasinski mode to analyze the interest term structure of our inter-bank market and combine term structure with local company’s credit spread so as to value Chinese municipal bonds.