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Article

The Design and Estimation of a Bi-National Bond to Finance Strategic Infrastructure along the U.S.–Mexico Border

Harikumar Sankaran, Violeta Díaz and Salvador Espinosa
The Journal of Structured Finance Summer 2013, 19 (2) 71-88; DOI: https://doi.org/10.3905/jsf.2013.19.2.071
Harikumar Sankaran
is a professor of finance at the College of Business at New Mexico State University in Las Cruces, NM.
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  • For correspondence: sankaran@nmsu.edu
Violeta Díaz
is an assistant professor of finance at the College of Business at New Mexico State University in Las Cruces, NM.
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  • For correspondence: diazv@nmsu.edu
Salvador Espinosa
is an assistant professor of government finances and public policy in the School of Public Affairs at San Diego State University in San Diego, CA.
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  • For correspondence: salvador.espinosa@sdsu.edu
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Abstract

The magnitude of funds needed to improve infrastructure along the U.S.–Mexico border has substantially outstripped the sources, resulting in a deteriorating environment and border security and placing the inhabitants at risk. Traditionally, the federal government in each country allocates a small budget to the North American Development Bank (NADB), a bi-national institution that manages infrastructure development. This article defines a bi-national bond that can be issued by the NADB in U.S. dollars and/or Mexican pesos and estimates the spread for default risk and premiums for the built-in hedge against adverse movements in interest rates and exchange rates. As of May 2012, the authors estimate a B rated, two-year zero, bi-national bond denominated in pesos will yield 9.645% without the hedge and 2.86% with the interest rate and exchange rate hedges. The structured feature of the bond helps in lowering the cost of financing.

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The Journal of Structured Finance: 19 (2)
The Journal of Structured Finance
Vol. 19, Issue 2
Summer 2013
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The Design and Estimation of a Bi-National Bond to Finance Strategic Infrastructure along the U.S.–Mexico Border
Harikumar Sankaran, Violeta Díaz, Salvador Espinosa
The Journal of Structured Finance Jul 2013, 19 (2) 71-88; DOI: 10.3905/jsf.2013.19.2.071

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The Design and Estimation of a Bi-National Bond to Finance Strategic Infrastructure along the U.S.–Mexico Border
Harikumar Sankaran, Violeta Díaz, Salvador Espinosa
The Journal of Structured Finance Jul 2013, 19 (2) 71-88; DOI: 10.3905/jsf.2013.19.2.071
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  • Article
    • Abstract
    • RELATED LITERATURE
    • ESTIMATION OF DEFAULT RISK
    • ESTIMATION OF PREMIUM FOR EXCHANGE RATE RISK HEDGE
    • ESTIMATION OF EXCHANGE RATE AND INTEREST RATE RISK HEDGE PREMIUMS
    • Numerical Illustration
    • Cross-Currency Bond Option Model and Estimation
    • Term Structure Estimation
    • Cross-Currency Bond Option Model and Estimation
    • Bi-National Bond Valuation
    • DISCUSSION AND CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
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  • PDF (Subscribers Only)

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