Types of OATs

NYSE Euronext offers three types of OATs for individual investors which we will take a look at individually:

  • Fixed-Rate OATs
  • Index-Linked OATs
  • Capitalization OATs

Fixed-rate OATs
Fixed-rate OATs provide investors with a regular source of fixed income. They have three main advantages:

  • Market liquidity
  • Performance
  • Security

Fixed-rate OATs are issued by the Agence France Trésor for terms up to 50 years with a nominal value of € 1. OATs are repaid as a lump sum at maturity and are always redeemed at par, i.e. at their nominal value of € 1 per tranche. They are also known as "nominal OATs."

OATs are a steady source of income because holders are entitled to an interest payment (called a coupon) once a year throughout the life of the title, (i.e., until it is repaid).  This annual coupon never varies over the entire life of the OAT, regardless of market conditions. The maturity dates and coupon payment dates for fixed-rate OATs are April 25 or October 25.  The last interest payment is made on the date of reimbursement.

When you buy a fixed-rate OAT on the market, you can be certain of two things: the amount you will be repaid at maturity and the amount you will receive in annual interest, since these elements never vary. However, if you sell an OAT before maturity, it will be sold at the current market price. Because of this, you will see a gain or a loss depending on current market performance.

Let’s look at an example:  In the case of a fixed-rate OAT paying 4% interest with an October 25, 2014 maturity date, the principal repaid at maturity in 2014 will be €1 per tranche. The interest earned each year is 4%, so the holder will receive €4 for every €100 invested, each October 25 until maturity, in 2014.

Index-linked OATs
Index-linked OATs are intended for investors who want the benefit of a steady income stream but are concerned about any long-term erosion of value due to inflation.

Linked OATs have three main advantages:

  • Market liquidity
  • They protect the purchasing power of investment
  • Portfolio diversification

OAT indexed bonds are fixed real rate, with the principal at maturity always at a par value of €1. They are also protected against French inflation (OATi) or European inflation (OAT € i) because they link the principal to a daily reference point calculated in relation to an index ( the French consumer price index (excluding tobacco) for OATi, and the harmonized price index for the Euro zone (excluding tobacco) for OAT€i.

The annual coupon is a fixed fraction of the indexed principal, meaning both principal and coupon are protected against inflation. The holder receives a fixed amount predetermined by the percentage of the rate applied to the principal, and a variable amount that is indexed to inflation.

OATi and OAT€i are intended for investors who want to protect the purchasing power of their investments. These OATs also help to diversify a portfolio because their market price is less sensitive (on average) to interest-rate movements than that of nominal OATs. France is the first country in the Euro zone to have issued this kind of security.

Let’s look at another example:  A coupon paid by the OATi paid a 3% interest with a July 25, 2009 maturity date.  On July 25, 2005, the indexation coefficient for this OATi was 1.10984. An investor who owned 10,000 bonds worth €1 on 25 July 2005, received a coupon for 3% x 10 000 x 1.10984 = €332.95.

The general formula is: = 3% coupon OATi x nominal rate x indexation coefficient.

If you sell an OAT before maturity, you must sell it at market price, which could result in a capital gain or capital loss depending on purchase price and current market performance.

Capitalization OATs
Capitalization OATs are intended for investors who don't need regular coupon payments and would like to secure long-term savings for retirement. The main advantage of capitalization OATs is that they allow a holder to establish a source of long-term savings with a lower initial investment than that required by fixed-rate OATs.

Capitalization OATs (also known as “zero coupon” or “stripped” OATs) are created from nominal fixed-rate OATs by separating out the coupon (“coupon certificate”) from the principal (“principal certificate”). Because this type of OAT does not pay an annual coupon, it has a lower subscription price.

An investor in capitalization OATs knows at the time he acquires the OAT how much he will receive when the instrument reaches maturity since the capitalization OAT is always repaid at par, i.e. €1.

The market value of the capitalization OAT is necessarily below par. However, it fluctuates in line with market rates. An investor who sells the OAT before the maturity date may see a capital gain or a capital loss. The value of a capitalization OAT is also more sensitive to interest-rate movements than that of an OAT that has not been stripped, especially when its maturity date is a long way off.

Here’s an example: The "principal certificate" of the OAT is 4%  and its maturity date is 25 April 2013.  This stripped OAT which was bought on NYSE Euronext for €0.7822 on 17 June 2005  will be reimbursed for €1 on April 25, 2013.

If a holder invested a total of €7 822 on 17 June 2005, he or she will receive €10 000 on April 25, 2013. This amount is guaranteed repayment. The investor will not receive a slip between the purchase and redemption but as long as he holds the security until maturity, he is certain to make a capital gain of € 2 178.

Note: All certificates have a nominal stripped coupon of €0.25. The notional value of a principal certificate is €1. Only certain certificates of principal OATs maturing in April are now listed continuously on NYSE Euronext.

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