Methodical approach to valuation of government bonds and recommendations for its application in order to conduct scenario analysis

The article offers a methodological approach to valuation of Russian government bonds (OFZ) on the Russian market. The approach is based on the dissection of the g-curve into three main components that characterize the level, slope and curvature of the yield curve using the principal component method (PCA). Such a stratification provides an opportunity to evaluate bonds on the stock market. Moreover, the listed main components characterize various characteristics of the entire yield curve. The level shows the weighted average yield of bonds, the slope reflects the difference in yields of short-term and long-term bonds, and the bulge characterizes the ratio of yields of medium-term bonds to short-term and long-term. Specialized econometric models were used to analyze each component: a hidden Markov model with switching modes (for the rate level) and autoregressive models with exogenous variables (for slope and bulge). As a result, a method is proposed to identify the key factors affecting federal loan bonds, assess their contribution to the formation of bond yields, and assess the value of any issue of OFZ. The approach is adapted to the peculiarities of the domestic market, recommendations are given on the application of this approach in order to conduct scenario analysis, which ensures its practical applicability for forecasting profitability and managing investment portfolios. The work contributes to the development of methods for assessing debt instruments in emerging markets.