Volume Weighted Average Yield

If a bond trades three times in a day at three different yields, which yield should a fund use to value it? A simple average treats a tiny trade the same as a very large one. Volume weighted average yield gives each trade weight in proportion to its size, so the big trades — the ones that really tell you where the market is — count for more.

The workbook uses VWAY in the valuation of debt held by Category III AIFs, as part of the mark-to-market approach. It draws one distinction that is easy to examine: which trades go into the average. For T-bills and G-Secs, it is the trades in the last one hour of trading. For all other money market and debt securities, it is all trades during the day.

The workbook's valuation rules for debt:

Supporting points in section 8.2.3:

• Money market instruments — T-bills, CDs, CPs, bills of exchange — have a tenor not exceeding one year: overnight (one working day), notice (2 to 14 days) and term (15 days to one year).
• They are valued by mark-to-market using the average of security-level prices disclosed by FBIL, CCIL, FIMMDA and similar agencies; the prices of all G-Secs are published by FBIL, CCIL and FIMMDA.
• A debt security is a traded debt security when, on a specific Valuation Day, trades are reported in marketable lots on a recognised stock exchange or CCIL.

The workbook's reason for all this: mark-to-market is more reliable and transparent than amortized cost, though it may reduce managers' discretion in valuing debt.

VWAY = Σ (Yield of each trade × Volume of that trade) ÷ Σ Volume

Illustrative figures. A Category III AIF holds a G-Sec. Trades reported during the day:

G-Sec — last hour only:

VWAY = (50 × 7.10 + 30 × 7.14 + 20 × 7.05) ÷ (50 + 30 + 20)
     = (355.0 + 214.2 + 141.0) ÷ 100
     = 710.2 ÷ 100 = 7.102%

The Rs 200 crore trade at 11 am is ignored, however large. A simple average of the three last-hour yields would give 7.0967% — close here, but it gives the Rs 20 crore trade the same say as the Rs 50 crore one.

If the same trades were in a corporate bond, the whole day counts:

VWAY = (200 × 6.95 + 710.2) ÷ 300
     = (1,390 + 710.2) ÷ 300 = 2,100.2 ÷ 300 = 7.0007%

Had the G-Sec not traded at all in the last hour, it too would fall back to the whole day's VWAY.

Chapter 8 (Valuation), section 8.2.3 Positions in Money Market Instruments and Long Term Fixed Income Securities is the source. The distinction between the last-hour rule for T-bills and G-Secs and the whole-day rule for everything else — including G-Secs that did not trade in the last hour — is the natural question. The same section's money market tenor buckets and the definition of a traded debt security sit alongside it.

• Last hour is only for T-bills and G-Secs. Every other money market and debt security uses all trades during the day.
• A G-Sec with no last-hour trade uses the whole day's VWAY, not the previous day's.
• Weighted by volume, not by number of trades.
• Two descriptions of money market valuation sit side by side. The workbook says money market instruments are marked to market using the average of prices from FBIL, CCIL, FIMMDA and similar agencies, and in the same section says T-bills are valued on the last hour's VWAY. Both are the workbook's statements; if asked specifically about T-bills and G-Secs, the VWAY rule is the one it spells out.
• Mark-to-market, not amortized cost, is the workbook's preferred approach wherever trades exist.