03 - Brazilian Government Bonds | B3

03 - Brazilian Government Bonds

Government bonds

The main public fixed income securities in Brazil are government bonds issued by the National Treasury. The government issue these securities to raise funds that help defray/settle their obligations, such as the payment of salaries and investments in education and health. Government bonds are divided into two categories: floating-rate bond and fixed-rate bond.

In floating-rate bonds, the return at maturity is already defined at the purchase. Fixed-rate bonds are remunerated according to the rate to which they are indexed – the Selic or the IPCA. 

Learn about the main characteristics of each bond:

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 will prevail so that the 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

Government bonds are subject to credit and market risks.

  • Credit risk: possibility of the issuer, in this case the government, failing to pay interest and principal on the agreed dates. This risk is measured using several methodologies, such as EMBI+ (Risk Brazil) and the ratings published by rating agencies.
    • EMBI+ (Risk Brazil): the EMBI+ (Emerging Markets Bond Index) is a bonus based index (debt bonds) issued by emerging countries. It shows the financial returns daily obtained by a selected portfolio of bonds from those countries. The unit of measure is the basis point. Ten basis points are equivalent to one-tenth of 1%. The points show the difference between the rate of return from emerging countries’ bonds and the rate offered by bonds issued by the U.S. Treasury. This difference is the spread, or the sovereign spread.

    • Rating Agencies: sovereign credit rating is given by institutions specialized in credit risk analysis attaching scores to the debt issuing country. These rating agencies evaluate a country's ability and willingness to honor its debt payments fully and in a timely manner. The rating is a relevant instrument for investors as it provides an independent opinion regarding debt credit rating of the country assessed. Officially, Brazil has a credit rating agreement with the following agencies: Standard & Poor's (S&P), Fitch Ratings (Fitch) and Moody's Investor Service.

  • Market risk: price fluctuations of government bonds caused by changes in interest rates and inflation rates. Due to several factors, the interest rate curve can be changed, causing the price of government bonds to change. As the interest rate is inversely proportional to the unit price, the rise of one leads to the fall of the other.

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