Fixed income pricing: What goes into pricing a bond? | Insights | Bloomberg Professional Services (2024)

In today’s volatile, complex and increasingly regulated financial markets, the need for accurate, transparent securities pricing is critical. Understanding what goes into the price of a fixed income security is critical for market participants to make trading and execution decisions with confidence.

Demystifying the BVAL Score

Bloomberg Evaluated Pricing Service (“BVAL”), provides prices for over 2.8 million bonds across the liquidity spectrum, ranging from highly liquid securities to thinly traded and hard to price bonds.

To price these bonds, BVAL receives data from a variety of sources, to ensure that the price determined reflects the underlying market conditions. These sources include contracted data suppliers such as exchanges; publicly available trade reporting sources, such as MSRB, TRACE and MiFID data; market quotes from banks, broker-dealers and other Bloomberg Terminal subscribers; as well as data provided by BVAL subscribers (e.g., through the price challenge process). Any of these data sources may be incorporated into BVAL’s models and used to generate a BVAL price.

To help clients and users better understand what goes into pricing a bond, especially if it’s a thinly traded bond, each BVAL price comes with a score.

What does the BVAL Score measure?

The BVAL Score is a proprietary and innovative measure on a scale of 1 (the lowest) to 10 (the highest) of the amount and consistency of the market inputs used to calculate each BVAL price. It measures the relative strength of the recency, quantity, and quality of market data used to calculate the BVAL price for a particular security at a particular snapshot. While the score does not assess the accuracy of a BVAL price, it does provide a window into the underlying data inputs used by BVAL in arriving at that price. In other words, the higher the BVAL score, the greater the quantity, the higher the quality and the more recent the data inputs are underlying the score.

To put these scores in perspective, it’s helpful to understand BVAL’s two pricing models: Direct Observations and Observed Comparables. Direct Observations means BVAL first assesses available market data with respect to the target bond, which may consist of trades, executable levels or indicative quotes. For an executable level or indicative quote to be included in the Direct Observations algorithm, there must be at least two data points from at least two different dealers and those data points must be at sufficiently proximate levels.

When direct observations are not available or are insufficient, BVAL uses the Observed Comparables model. This means BVAL assesses data regarding bonds that, in BVAL’s determination, are comparable to the target bond to derive a price on the target bond. The final BVAL price is determined by aggregating the weighted average of Direct Observations and Observed Comparables and is based on the relative strength of the output of each model’s algorithm. However, when direct observations of a price are not available, the max BVAL Score is a 5.

The BVAL Score is not a statement of accuracy, relative quality or an indicator of confidence in the BVAL Price.

When is a low BVAL score helpful?

A lower BVAL score means the BVAL price was generated by the Observed Comparables model and/or by the Direct Observations model but with aged data. In this scenario, BVAL may still be high quality as it incorporates other market information such as issuer curves, sector curves and market spreads to determine price. Therefore, a lower BVAL score should be viewed as an indication of lower liquidity, not lower quality.

Meanwhile, a higher BVAL score reflects that the BVAL price was generated by the Direct Observations model, using recent direct observations on the target bond such as trades, and/or with high corroboration across multiple executable or indicative data. This is equally valuable intel because it provides users with an understanding of the market data supporting a BVAL valuation.

Clear, defensible pricing

BVAL provides transparency into how each price valuation is produced, detailing and explaining the process with insight into the data inputs and methodologies used so clients can understand how pricing valuations are derived. To learn more about BVAL, view our website here.

BVAL is a service provided by Bloomberg Finance L.P. and its affiliates. BVAL valuations do not express an opinion on the future or projected value of any security and are not research recommendations (i.e., recommendations as to whether or not to “buy”, “sell”, “hold”, or to enter or not to enter into any other transaction involving any specific interest) or a recommendation as to an investment or other strategy. No aspect of the BVAL valuation or other data is based on the consideration of a customer’s individual circ*mstances and information available via BVAL should not be considered as information sufficient upon which to base an investment decision. You should determine on your own whether you agree with the BVAL valuation. BVAL may not be available in certain jurisdictions. BVAL is not recognized or licensed as an official pricing provider in any jurisdiction, and should not be relied upon to comply with any laws or regulations that prescribe the use of prices issued by authorized pricing providers. BVAL should not be construed as tax, accounting, legal or regulatory advice or opinions, or sufficient to satisfy any tax, accounting, legal or regulatory requirements. You are solely responsible for the selection and use of appropriate parameters, inputs, models, formulas and data for meeting your tax, accounting, legal or regulatory requirements. Employees involved in the BVAL services may hold positions in the securities included in the BVAL services.

Bloomberg and its affiliates, in providing the BVAL services, believe that the information it uses comes from reliable sources, but do not guarantee its accuracy.