Emerging Markets Bond Index Plus (EMBI+) JPMorgan

Emerging Markets Research
Bond Index
J.P. Morgan Securities Inc.
December 2004
Emerging Markets Bond Index Plus (EMBI+)

Rules and Methodology
The EMBI+ was created in response to investor demand for a liquid
emerging markets debt benchmark
The EMBI+ is a traditional, market-capitalization weighted index
comprised of USD-denominated Brady bonds, Eurobonds, and traded
loans issued by sovereign entities
Daily historical levels are available from December 31, 1993
Overview
The JPMorgan Emerging Markets Bond Index Plus (EMBI+) is our most
liquid US-dollar emerging markets debt benchmark, and tracks total
returns for actively traded external debt instruments in emerging markets.
Included in the EMBI + are US-dollar denominated Brady bonds,
Eurobonds, and traded loans issued by sovereign entities.
The EMBI+ provides investors with a definition of the market for liquid
emerging markets sovereign debt and its traded instruments. It segments
further the universe of emerging markets as defined by the more
comprehensive EMBI Global and EMBI Global Diversified, by placing a
strict liquidity requirement rule for inclusion. Other differences in
inclusion rules apply. (Please refer to the methodology piece EMBI Global
and EMBI Global Diversified: Rules and Methodology for more
information on the EMBI Global/Diversified).
To be deemed an emerging market by the EMBI+, a country must be rated
Baa1/BBB+ or below by Moodys/S&P rating agencies. This criterion,
along with the liquidity ranking rule, carves out a basket of liquid bonds,
each capable of being bought and sold at short notice, and quoted daily by
several market makers at relatively low bid/offer spreads. The EMBI+ is
transparent and timely, representing opportunities available to investors in
this market. It is geared toward managers of index funds who strictly
adhere to the performance and portfolio changes of the index.
Gloria M. Kim
(1-212) 834-4153
gloria.m.kim@jpmorgan.com
The certifying analyst(s) is indicated by the notation AC. See last page of the
report for analyst certification and important legal and regulatory disclosures.
www.morganmarkets.com

Emerging Markets Bond Index Plus
Gloria M. Kim (1-212) 834-4153
Jennie Byun (1-212) 834-4029

jennie.y.byun@jpmorgan.com
Alvin Ying (1-212) 834-7139

alvin.ying@jpmorgan.com
Table 1: EMBI indices at a glance

Inclusion criteria
EMBI+
EMBI Global
EMBIG Diversified
Rated Baa1/BBB+
or under by
Moodys/S&P
Low/Middle income for

two consecutive years
as per World Bank
Low/Middle income for

two consecutive years
as per World Bank
$500 million
$500 million
$500 million
Maturity requirement
for initial entry
At least 2.5 years

until maturity
At least 2.5 years

until maturity
At least 2.5 years

until maturity
Maturity requirement
to maintain inclusion
At least 1 year
until maturity
At least 1 year
until maturity
At least 1 year
until maturity
Must pass a series of

liquidity tests (a minimum
bid/ask price and specific number
of interdealer broker quotes)
Daily available pricing

from an interdealer
broker or JPMorgan
Daily available pricing

from an interdealer
broker or JPMorgan
Country requirements
Instrument requirements
Minimum issue size
Liquidity criteria
Face amt. constrained
No
No
Yes
Includes quasi-sovereigns
No
Yes
Yes
Table 2: Other JPMorgan indices

Index
Latin Eurobond Index (LEI)
Includes
Latin American USD-denominated sovereign and corporate
bonds
Russia Corporate Bond Index (RUBI)
Russian corporate bonds denominated in USD
JPMorgan Asia Credit Index (JACI)
Asian USD-denominated sovereign and corporate bonds
EURO EMBIG/Diversified
EURO-denominated sovereign and quasi-sovereign bonds
Emerging Local Markets Index Plus (ELMI+) Money market instruments within emerging markets
denominated in local currency
Dow Jones CDX.EM
Credit default swaps: a liquid, diversified basket of emerging

market sovereign CDS
Index inclusion selection process

We adhere to a strict set of rules for selecting countries and instruments for
inclusion in the EMBI+. To be included in the EMBI+, bonds must meet both
eligibility and liquidity requirements. When a bond meets both requirements, it
is added to our indices; when it does not, it is dropped. Instruments that satisfy
all the following defined criteria will be eligible for inclusion in the EMBI+:
1. Instrument type
2. Issuer type classification;
3. Currency denomination;
4. Credit rating criteria;
5. Current face amount outstanding;
6. Remaining time until maturity;
7. Legal jurisdiction;
8. Settlement method;
9. Quantifiable source of cash flow return; and
10. Liquidity Ranking.
December 2004

Gloria M. Kim (1-212) 834-4153
Jennie Byun (1-212) 834-4029

Alvin Ying (1-212) 834-7139

Instrument Type
The EMBI+ includes both fixed and floating-rate instruments, as well as
capitalizing/amortizing bonds or loans. Bonds or loans with embedded options
and warrants are eligible for inclusion if a) the options/warrants are attached to
instruments that would otherwise be included in the index and b) the quotation
convention (as recommended by the Emerging Markets Traders Association) is
for instrument prices to be quoted cum options or warrants. Convertible bonds
are not eligible for inclusion into the index.
Issuer type classification
The EMBI+ contains only bonds or loans issued by sovereign entities from
index-eligible countries. Quasi-sovereigns are not eligible for the EMBI+ even
if the entity is 100% owned by the government. Instruments issued by
municipalities or provinces are also not eligible for inclusion.
Instruments will not be eligible for inclusion in the index if their credit has been
improved by a) giving security over commercial receivables or b) giving a
guarantee from a guarantor which is not a subsidiary of the eventual obligor or
the parent company/beneficiary of the issuer of the instrument. For the
purposes of clarification, bonds that are secured in part by US Treasuries (e.g.
Brady bonds) are eligible for inclusion.
Where financing vehicles are used, bonds or loans may be included in the
EMBI+ if either 1) the financing vehicle or bond is guaranteed by an index eligible
issuer or 2) the transaction is structured as a pass-through where the creditor of
the financing vehicle has full recourse to the underlying loan or bond between the
financing vehicle and the final obligor, which itself must be an index eligible issuer.
In order to avoid double counting of index instruments, a bond or loan that is
issued by a financing vehicle is only eligible for inclusion into the EMBI+ if the
underlying loan or bond is not itself included in the index.
Currency denomination
Only those instruments denominated in US dollars are considered for inclusion.
Instruments denominated in US dollars where the amount of coupon or
redemption payment is linked to an exchange rate are not eligible for inclusion.
Prior to 1998, external-currency denominated instruments other than US-dollar, as
well as corporates, were allowed in the EMBI+, but have since then been removed.
Credit rating criteria
Eligible instruments are determined by the rating assigned by Moodys and
S&P to the bonds originating country. Since the EMBI+ covers external-currency
debt, we have defined emerging markets countries according to the ability to repay
external-denominated debt. A country must be rated Baa1/BBB+ or below in
its long-term foreign currency rating for its instruments to enter and remain in the
index. When a country receives a rating of A-/A3 or higher from both Moodys
and S&P, it is dropped from the EMBI+ at the next month-end rebalancing.
Current face amount outstanding
Only issues with current face amount outstanding of $500 million or more will
be considered for inclusion.
December 2004

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Jennie Byun (1-212) 834-4029

Alvin Ying (1-212) 834-7139

If an issues current face outstanding falls below this requirement (due to either
a debt retirement by the sovereign or the amortization of principal), the issue
will be removed from the index at the next month-end rebalancing date. The
reverse also holds true. Existing issues that, through reopenings, increase in
size to satisfy our minimum current face outstanding requirement are then
considered for inclusion in the index at the next month-end rebalancing date.
Time until maturity
A bond can only be added to the EMBI+ as long as its remaining life is greater
than 2 1/2 years at the time at which it satisfies our inclusion criteria. Once an
issue is added to the EMBI+, it may remain there up until 12 months prior to
maturity, assuming it continues to meet our inclusion criteria.
An instrument that has been dropped from the EMBI+ is not eligible to re-enter
the EMBI+ for 12 months. Such a step further ensures that the composition of
each index is not subject to temporary liquidity trends.
Legal Jurisdiction
Effective May 31, 2002, inclusion into the EMBI+ is limited to issues with legal
jurisdiction that is domestic to a G7 country. Local law instruments or bonds
that do not fall under G7 jurisdiction are not eligible for the index.
Settlement Criteria
Instruments in the EMBI+ must be able to settle internationally (either through
Euroclear or another institution domiciled outside the issuing country).
Quantifiable source of cash flow return
JPMorgan reserves the right to exclude from the composition of the EMBI+ any
debt instrument that it considers to have a cash flow structure from which
verifiable daily returns or other statistics (i.e. yield, spreads) cannot be calculated.
Liquidity Ranking
Once the eligibility requirements are met, liquidity criteria are applied to the
remaining universe of instruments. We look at three attributes to determine
liquidity ratings: (1) size of the issue, (2) average monthly bid/ask spread, and
(3) number of designated brokers providing daily quotes. The following table
summarizes our liquidity ratings:
Rating
Definition
L1
$2 billion face amount outstanding minimum, average bid/ask spread <= 3/8 point, and quoted by
100% of all designated brokers
L2
$1 billion face amount outstanding minimum, average bid/ask spread < = 3/4 point, and quoted by
at least 1/2 of the designated brokers
L3
$500 million face amount outstanding minimum, average bid/ask spread <= 1 1/2 points, and
quoted by at least 1/4 of the designated brokers
L4
$500 million face amount outstanding minimum, average bid/ask spread <= 3 points, and quoted
by at least 1 designated broker
L5
$500 million face amount outstanding minimum, average bid/ask spread => 3 points, and not
quoted by any designated brokers
December 2004

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Jennie Byun (1-212) 834-4029

Alvin Ying (1-212) 834-7139

For a bond to be added to the EMBI+, it must be rated:

L1 for 1 month, or
L2 or higher for 3 consecutive months, or
L3 or higher for 6 consecutive months.
For a bond to be dropped from the EMBI+, it must be rated:
L4 for 6 consecutive months, or
L5 for 1 month.
Timing of the addition of new issues

A new issue that meets the EMBI+ admission requirements is added to the index
on the first month-end business date after its issuance, provided its issue date falls
before the 15th of the month. A new issue whose issue date falls on or after the
15th of the month is added to the index on the last business day of the next month.
There are two exceptions to the rule. The first exception applies to a new issue
that is released as part of a debt exchange program. For example, assume a
country exchanges a portion of its outstanding debt for a new issue after the
15th of the month. At the month-end rebalancing date immediately following
this event, the amount of debt retired in this exchange would be removed from
the EMBI+,and the new issue would be added to the index (provided official
exchange results are made available in a timely manner).
The second exception concerns Reg S securities. An instrument that is issued
purely in reliance on Regulation S of the U.S. Securities Act of 1933 and not
pursuant to Rule 144A will be ineligible for inclusion in the EMBI Indices until
it is seasoned (that is, until the expiration of the relevant Regulation S restricted
period). The date at which the seasoning restriction is lifted will effectively be
the new issue date, at which point the 15th of the month rule will apply.
In extreme cases, an intra-month rebalancing can occur, where the EMBI+ is
rebalanced before the end of the month. An intra-month rebalancing is
triggered when:
More than $6 billion of the face amount of EMBI+ bonds are exchanged, or
More than 2/3 of the face amount of any one of the most liquid (identified as
bonds with an L1 rating) index bonds is exchanged
Please refer to the Intra-Month Rebalancing Methodology, dated May 31, 2001
for precise details on the mechanics behind intra-month rebalancings.
If an announcement is made for a bond to be called, it is removed the monthend
prior to its call date on the basis of having less than 12 months remaining until
maturity. If an announcement is not made in time for the bond to be removed
the prior monthend, it will be removed the first monthend following the
announcement, unless the amount to be called triggers an Intra-month
rebalancing (rules above).
December 2004

Gloria M. Kim (1-212) 834-4153
Jennie Byun (1-212) 834-4029

Alvin Ying (1-212) 834-7139

Index weighting methods

The weight of each instrument in the EMBI+ is determined by dividing the issues
market capitalization by the total market capitalization for all instruments in the
index. The result represents the weight of the issue expressed as a percentage of
the EMBI+. Country weights for the EMBI+ are easily calculated by aggregating
the weights of the instruments for each country. The market capitalization of
each issue is calculated by multiplying its face amount outstanding by its bidside settlement price. Face amounts outstanding for each issue are updated at
each month-end in order to reflect market eventssuch as reopenings or
buybacksthat have increased or decreased the issues available supply.
Daily Production of the EMBI+

The EMBI+ is produced every business day of the year. Business days are
based on the US bond market calendar set by the Emerging Markets Traders
Association (EMTA).
Pricing on regular business days
The EMBI+ is priced at 3:00pm Eastern Standard Time (EST) every business day
of the year as defined by the US bond market calendar. Composite instruments
are priced using the best market bid (highest) and the best market ask (lowest)
indicated by the following emerging market broker screens: Eurobrokers,
Garban, GFI, Tullet & Tokyo, and Tradition. For instruments where there is not a
valid price available at 3:00pm EST, the last available valid price is obtained from
the market. As a last resort, if there are no valid market prices for an instrument,
JPMorgan traders are asked to provide a market bid and ask. For those
instruments where pricing is not available on a regular basis, the composition
methodology ensures that such instruments are excluded from the EMBI+.
Early closes
When the US bond market closes early, typically before market holidays or
when EMTA recommends an early close, prices of EMBI+ instruments are
captured at the latest possible time to reflect an active closing market. The
liquidity of the EMBI+ is somewhat determined by whether international
markets are open. On certain international holidays when the capital markets of
many countries are closed, the liquidity of the EMBI+ diminishes and the index
is closed early to accurately reflect market prices.
December 2004

Gloria M. Kim (1-212) 834-4153
Jennie Byun (1-212) 834-4029

Alvin Ying (1-212) 834-7139

Where to find the EMBI+

Daily EMBI+ results can be found in the following places:
MorganMarkets (morganmarkets.com): Contains downloadable files of
daily country and instrument returns, statistics, and compositions, as well as
data series of historical index levels and sovereign spreads.
Dataquery on MorganMarkets: Allows clients to view, manipulate and
download user-specific queries. Access Dataquery via MorganMarkets
website from Tools > Business Tools.
Reuters: Page <EMBI01> offers a directory of results for all JPMorgan
emerging markets bond indices; pages <EMBI19>and <11EMJ> display
closing and real-time levels for the EMBI+, respectively.
Bloomberg: Page <JPMX> is the directory page for all JPMorgan EMBI
indices and their closing levels; options 4 and 5 display closing index levels
and statistics; page <JPME3> displays real-time levels for the EMBI+.
JPMorgans monthly Emerging Markets Bond Index Monitor contains index
returns, statistics, and composition updates for all of our emerging markets indices.
Custom Index Builder

JPMorgan has also made available the Custom Index Builder (via
MorganMarkets > Tools). This on-line tool allows clients to create customized
indices based on the following categorization:
country selection
fixed versus floating rate-type
maturity buckets
performing versus non-performing status
credit ratings
collateralized and uncollateralized profile
Clients can choose to fix their custom portfolio weights or let it float on a
market-cap weighted basis. Using the JPMorgan Custom Index Builder,
investors can hone in on the specific sectors applicable to their portfolios or
evaluate potential investment scenarios with ease.
December 2004

Gloria M. Kim (1-212) 834-4153
Jennie Byun (1-212) 834-4029

Alvin Ying (1-212) 834-7139

Appendix: Instrument and index total

return calculations
The following is a description of our methodology for calculating returns (total,
price, and interest returns). Section I describes single-instrument returns.
Section II describes index total returns. Section III describes yields and spread
calculations for single instruments and the index as a whole.
The total return calculation for a single instrument is a means of representing
the economic benefit of holding the specific security. In its simplest form, it is
based on the cash in/cash out notioni.e., what is paid for the security at the
initial purchase versus what is received at its sale. Of course, most fixed income
securities pay some form of coupon along the way, and some pay amortizations.
For the calculation of individual instrument total returns, this cash is reinvested
in the instrument when received. However, when the instrument is part of a
portfolio whose allocations are based on market capitalization (in the case of
the EMBI+), the use of this market capitalization weighting scheme in effect
causes this cash to be proportionately reinvested in the other instruments that
make up the portfolio.
The means of calculating the total return on a basket containing various
instruments is an extension of the single-instrument total return framework. To
hold a passive portfolio, one would buy the instruments in the same
proportions in which they comprise the EMBI+. Each proportional amount is a
function of both the amount of the instrument outstanding (based on publicly
available information) and its settlement price. These two factors, when
multiplied together, equal the assets market capitalization.
I. Single-instrument return
The total return on a performing instrument is measured from one trade day to
the next using the following generalized equation:
1.
trt =
ESVs(t) + C v(t) + AM v(t)

ESVs(t 1)
FX i, t
FX i, t 1
This equation captures the three main components of a fixed income assets
value: price, cash flow (coupon and/or amortization) and currency. These
components are represented by:
ESVs (t )
Effective settlement value; primarily a function of the effective

settlement price but also of the ex-coupon and ex-amortization rules
[see equation (2) below]
C v (t )
If applicable, the coupon payment to which a holder on trade date t is

entitled on value date v(t); determined by the instrument structure,
ex-coupon conventions, and holiday calendar
December 2004

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Jennie Byun (1-212) 834-4029

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AM v (t )
If applicable, the amortization to which a holder on trade date t is

entitled on value date v(t); determined by the instrument structure,
ex-amortization conventions, and holiday calendar
FX i, t
Foreign currency exchange rate for currency i measured in U.S.

dollars per unit of foreign currency. Since the EMBI+ currently
contain only U.S. dollar-denominated instruments, currency does not
contribute to the indices daily returns.
Trade date; all index instruments trade on a New York holiday calendar
v(t)
Value date for trade date t; date used to calculate accrued interest,
which usually, but not always, coincides with the settlement date
s(t)
Settlement date for trade date t; date on which cash transaction occurs
The effective settlement value can be calculated as follows:

2.
ESVs(t) = ESPs(t) + xc v(t) + xam v(t)
where:
ESPs(t )
Effective settlement price, which is the price paid for a bond that is
traded on trade date t and settled on settlement day s(t). The settlement
date is determined by the settlement convention of the bond and
holiday calendar for the settlement convention; in short, the amount of
money, including accrued interest, etc., owed at the settlement date.
xc v (t )
Ex-coupon placeholder; in some markets, market convention

designates a date that begins an ex-period, ending on the coupon
payment date, during which a seller of the bond is entitled to keep
the upcoming coupon. This ex-period is usually 30 days. In effect,
the coupon is stripped from the bond, such that the current buyer is
no longer buying the rights to the coupon, and therefore the ESP paid
by the buyer should be reduced by the amount of the foregone
coupon. For the total return, however, it is imperative to maintain the
continuity of the traded asset i.e., the bond should be
reconstituted to its cum-payment before the ex-structure. To do
this, we account for the value this coupon represents to the seller via
an ex-coupon placeholder. Intuitively, the placeholder is an amount
representing the value of the next coupon discounted to the
settlement date of the transaction and is calculated as:
xc v(t) =
C
ds, t
(1 + L t ) 360
December 2004
Coupon amount to be paid at the end of the ex-period
Lt
One-month Libor, used as the cash rate for the discounting
ds,t
Number of days from settlement to the next coupon

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Jennie Byun (1-212) 834-4029

xamv(t)
Alvin Ying (1-212) 834-7139

Ex-amortization placeholder; this concept is completely analogous to

the ex-coupon placeholder and is calculated in the same way:
xam v(t) =
AM
(1 + L t
ds, t
) 360
The ex-coupon and ex-amortization placeholders are carried in both the

numerator and the denominator of the total return formula and effectively cease
to exist when the ex-period elapses.
Although this equation is sufficient for the generalized concept of total return,
complexities stem from the determination of the effective settlement price and
the treatment of interim cash flows. Therefore, below we describe the
differences between instrument types, then show how these differences are
incorporated into the generalized equation.
Effective settlement prices, ESPs(t)
Effective settlement price is the instruments settlement pricei.e., the
amount of money owed at settlement. ESP calculations translate the quoted
price into this settlement price, taking into account appropriate quotation
conventions and settlement practices.
The quotation and settlement of USD-denominated bonds in the emerging
markets currently follow guidelines set by two different groups. Brady bonds
and Eurobonds follow standard international settlement, set by the International
Securities Markets Association (ISMA). Price quoting conventions are
overseen, but not set by, the Emerging Markets Traders Association (EMTA);
EMTA members also agree upon trading and settlement practices for loans.
There currently are two settlement practices used for instruments in the EMBI+:
standard international settlement and loan settlement. The standard
international settlement period was seven calendar days through June 1, 1995,
and became three business days on June 7, 1995. Loan settlement follows an
EMTA prescribed batch settlement process, whereby trades executed during
specified time periods all settle on single pre-determined settlement dates.
Two types of price-quoting distinctions apply: the clean versus dirty pricing
convention and the current versus original face pricing convention.
Clean versus dirty quote conventions
The clean-dirty distinction refers to whether an instruments quoted price is
inclusive of accrued interest or not. Since the effective settlement price refers
to all money paid at settlement, if a bond is quoted clean, the accrued interest
through the value date owed at settlement must be added to the instruments price.
10
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Current face versus original face value quote conventions

The current face-original face value distinction applies to amortizing and
capitalizing bonds; it refers to whether a bonds quoted price is for a current
face amount of 100 or for the original face value of the bond, which may reflect
the fact that the instrument has amortized to an amount less than 100 or has
capitalized to an amount greater than 100. Since effective settlement price
refers to the money actually paid at settlement, which is based on the current
outstanding face value of the bond, an adjustment is made to the bonds quoted
price on a current-face basis to adjust it to an original-face basis. Table 3
shows the pricing conventions of instruments in the EMBI+.
Table 3: Price quoting conventions for EMBI+ instruments
Clean (without accrued interest)
Dirty (with accrued interest)
Current Face
Original face
Bradys, Euros,
Moroccan Tranche A
None
Argentine defaulted debt
For example, a bond that is trading at par but has just amortized 10% would
trade at a price of 100 on a current-face basis, but at a price of 90 on an originalface basis. Also, a bond that is trading at par and has just capitalized 10%
would trade at 100 on a current-face basis and 110 on an original-face basis.
The adjustment from a current-face to an original-face basis is achieved by
using a balance scalar, Bv(t), which keeps track of the remaining balance of a
bond after capitalizations and amortizations. For bonds that have amortized
from par, the balance scalar will be between 0 and 1, starting at 1 at issue and
decreasing to 0 at the final amortization (maturity) of the bond. For bonds that
capitalize, the number rises starting at 1, as determined by the capitalization
rates of the bond. This balance scalar strictly follows the quoting conventions
of a bond and is not necessarily related to the balance of outstanding bonds as
tracked by an issuer.
For example, in the case of bonds that trade with an ex-period for
amortizations, the ex-balance follows the same convention. If the bond goes
ex-amortization 30 days before the coupon, on that date the seller retains the
right to the coupon; therefore, the effective settlement price is lowered (jumps
down) by the amount of the amortization, since the buyer is no longer entitled
to it. For a bond trading on a current-face basis, this adjustment at settlement is
made via the Bv(t) scalar. This scalar is an important variable because it adjusts
other variables affecting the effective settlement price. Accrued interest, for
example, is normally computed on a cash basis (i.e., coupon rate x day count),
ignoring the current balance of the bond. Here, again, the scalar is used to
adjust the accrued interest for the balance on the bond.
Because the balance scalar is determined independently (i.e., it is based solely
on the cash flow structure and quoting conventions for the bond), it can be used
to scale all other variables. The remainder of this description assumes that all
non-price variables have been appropriately adjusted and, therefore, defined on
an original-face basis.
December 2004
11

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With these concepts in mind, we can generalize the equation for the effective
settlement price of performing instruments as follows:
3.
ESPs(t) = bp Qt if CO = 1, B v(t) , if CO = 0, 1
+ CO AC v(t) bp Qt + CD AI v(t)
where:
bp Qt
Bid price of a bond according to the quoting conventions of the

bonds market; total return is calculated on the bid side so as to
represent the cash out value of the bond on a given day
CO
Current face/original face value indicator:

1 = Bond quoted on a current-face basis (i.e., needs scaling if
applicable); and
0 = Bond quoted on an original-face value basis
Bv(t)
Face balance scalar used to adjust for principal balance due, as

determined by the cash-flow structure, and settlement and ex-balance
conventions
ACv(t)
Accrued capitalization; for bonds that capitalize and are quoted on a

current-face basis, an adjustment is made at settlement for the portion
of the next capitalization that is not included in the quoted price.
Since capitalization is a payment for principal (unlike accrued
interest, which is a payment for interest), the accrued capitalization,
AC, is multiplied by the quoted price; AC is determined analogously
to accrued interest (i.e., capitalization rate x day count convention)
CD
Clean/dirty indicator:
1 = Bond quoted on a clean basis; and
0 = Bond quoted on a dirty basis
AIv(t)
Current periods coupon rate x day count convention; this is

calculated up to, but excluding, the value date, v(t). Although
conventions covering accrued interest calculations can be
generalized, exceptions do apply.
Settlement and interest calculations

EMBI+ calculations take into account accrued interest conventions, settlement
conventions, and ex-coupon/ ex-amortization conventions of each security and
market.
Day-count basis
In general, the day-count basis will depend on whether a bond has a fixed or
floating rate. For fixed-rate bonds, it is usually 30/360, and for floating-rate
bonds, it is usually either actual/360 or Treasury actual/actual. Exceptions
exist, which apply to certain Brady bonds.
12
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Coupon payment
Depending upon the specific debt instrument, coupons can be scheduled
monthly, quarterly, semiannually, or annually. How the coupon end-of-period
and pay dates are set vary from bond to bond. Several conventions apply to
situations in which the end of a coupons period falls on a weekend or holiday,
as defined by EMTA. These conventions are detailed in Table 4.
Table 4: End-of-period conventions
If a scheduled end-of-period (EOP) date falls on a weekend or holiday, the end of period:
EOP/Pay 1
Remains on that date, and the actual pay date is moved to the next business day.
EOP/Pay 2
And the actual pay date are moved to the next business day.
EOP/Pay 3
And the actual pay date are moved to the next business day, unless that pushes them to the
next calendar month, in which case they are moved to the preceding business day.
EOP/Pay 4
And the actual pay date are moved to the next business day, and all subsequent ends of
periods are benchmarked from that day.
EOP/Pay 5
All hybrid cases of 1 through 4.
Coupon accrual
Generally, interest accrues from the previous coupon date (inclusive) to the
settlement date (exclusive). If a bond trades ex-coupon, negative accrued
interest will accrue from the ex-date to the coupon date.
Cash reinvestment
Since coupon income and amortization payments on performing instruments are
reasonably certain, reinvestment is done on the date on which the value date for
the trade captures the next cash payment. This allows the investor to affect the
reinvestment trade such that, when the trade settles, the cash payment is available.
Price and interest return
Price return is the component of total return that follows just the price
movement. Intuitively speaking, it is the original-face, clean-priced bonds
return, Pt(o,c). This bonds return is calculated using variables already defined:
4.
PtO, C = bp Qt { if CO = 1, Bv(t) , if CO = 0,1}+ CO ACv(t) bp Qt

+ xam v(t) { if CD = 0, AIV(t) , if CD = 1,0}
Price return, adjusted for currency, then is:

5.
Prt =
PtO,C + AM v(t)
C
PtO,
-1
FX i, t
FX i, t -1
Finally, interest return is simply a residual of total return and price return:
6.
December 2004
1 + irt =
trt + 1
Prt + 1
13

Gloria M. Kim (1-212) 834-4153
Jennie Byun (1-212) 834-4029

Alvin Ying (1-212) 834-7139

Treatment of non-performing instruments

In the event of an unexpected delay of or default on a payment, the specific
cash flow would not be recognized until the payment is actually received. The
calculation of an individual non-performing instruments return and the
resulting index return would follow the settlement-cash flow entitlement
convention set by either EMTA or a similar market trade group.
A default will not force the removal of the affected instrument from the EMBI+.
As long as the affected instrument continues to satisfy our inclusion criteria, it
will not be removed from the index.
II. Index total return

To compute a daily index value, we need to know the following:
1. The list of instruments to be included and their amounts outstanding;
2. The daily total return of each instrument; and
3. The weight of each instrument as of the prior business days close.
The first factor, the list of instruments and amounts outstanding, comprises
parameters that are exogenous to the other factors and, therefore, changes to it
should not result in changes in value of the index. These rebalancing events
are done to the index on the last business day of each month, such that the
indexs next months composition reflects the new instrument balance. When a
rebalancing event occurs, it is as if the investor sells the entire portfolio at the
days closing bid-side prices, and then immediately reinvests the proceeds in the
new portfolio in proportion to the new market values based on the same closing
bid-side prices. This results in a shift in the relative weights but not a change in
the overall portfolio value.
It is worth noting what is meant by the amount outstanding of an instrument.
Recall that amortizations and capitalizations, where applicable, result in
changes to the amount outstanding. These changes are passive, however, and
are already captured in the effective settlement price via the balance scalar.
Therefore, the figure used in determining market value is the original amount
outstanding, plus or minus any active changes to the amount outstanding
resulting from reopenings or buybacks (which we will refer to as N, the number
of bonds). Since this is an original-face-value concept, it is consistent with all
our other variables, also defined in terms of original face value.
14
December 2004

Gloria M. Kim (1-212) 834-4153
Jennie Byun (1-212) 834-4029

Alvin Ying (1-212) 834-7139

The total return on day t, TRt, is the arithmetically weighted average of each
instruments return from the period t-1 to t. The weights are marketcapitalization weights from the prior business day, t-1:
7.
TR t =
iL (t' )
i, t', t 1
tri, t
In this equation, the ith bonds dirty market-capitalization weight on day t-1
is defined by:
m i, t', t 1 =
N i, t' ESVi, s(t 1)
iL (t' )
i, t'
ESVi, s(t 1)
where:
iL (t' )
i, t', t 1
=1
and:
L(t)
t
Ni,t
Instrument list on day t

Last rebalancing day
Number of bonds (see above); usually equal to the amount outstanding,
except for capitalizing or amortizing bonds
Each term in the summation in Equation 7 measures the percentage contribution

of an instrument to the change in the index portfolios value between day t-1
and day t.
Since each instruments weight is updated daily, it is possible to see how cash
reinvestment is done. Because the effective settlement price of an instrument
drops concurrently with its cash payment (the accrued interest, balance scalar,
quoted price, or cash-promised variable drops, depending on the type of
instrument), the instruments market-capitalization weight drops, raising the
relative importance of the other instruments within the portfolio. This achieves
cross-index reinvestment. Since the scheduled cash flow causes the
instruments market capitalization and weight as a percentage of the index to
drop, a simultaneous increase in the weight of the other instruments in the index
occurs. As a result of this shift in instrument weights, from a mathematical
perspective cross-index investment of the cash flow is achieved.
Once the aggregate daily total return of the EMBI+ is known, it is then applied
to the indexs prior day closing level to arrive at the current days closing value:
8.
It-1
December 2004
I t = I t -1 (1 + TR t )
The closing cumulative total return index level for the EMBI+ as of the
prior business day (where December 31, 1993 = 100)
15

Gloria M. Kim (1-212) 834-4153
Jennie Byun (1-212) 834-4029

Alvin Ying (1-212) 834-7139

Price and interest return

All of the variables needed to calculate index price returns are defined above,
except for one. This remaining variable represents the clean market
capitalization, which is computed in an analogous way to the dirty market
capitalization, but uses the clean-price concepts described earlier for bonds and
loans, instead of the effective settlement price. Therefore, portfolio price return
is the weighted averagein which the weights are cleanof the price returns
of the constituent instruments. Interest return calculations continue to be based
on the same formula.
III. Yield and spread calculations

Instrument Level Yield
Blended Yield to Maturity is simply the internal rate of return of the bond
instrument. Stripped Yield measures the pure issuer risk by stripping out any
collateralized cashflows from the instrument. In the case for uncollateralized
bonds the blended yield is equal to the stripped yield. Stripped yield is usually
referred to as Sovereign Yield for the Emerging Markets sovereign bonds and the
EMBI indices. Embedded options are ignored for yield to maturity calculations.
Instrument Level Spread
Spread measures the credit risk premium over US Treasury bonds. The Blended
Spread is the regular Spread over Treasury. Spread over treasury is simply the
difference between the Yield to Maturity Bond and the Yield to Maturity of the
corresponding point on the US treasury spot curve. Since Yield to Maturity is
simply the discount rate at which all present value of all future cashflows equals
the market price of the bond, all cashflows are discounted at the same (flat) rate.
Spread Over Treasury is a poor measure of sovereign risk for Brady bonds. All
cashflows are discounted using the same rate, regardless of any collateral. For
collateralized debt, this rate represents the return on blended and sovereign risk.
For uncollateralized debt, this rate represents the return on pure sovereign risk.
Therefore comparisons between collateralized and uncollateralized bonds or
bonds with different amounts of collateral are distorted.
Stripped Spread is a better measure for these comparisons because it accounts
for collateral. In the calculation of stripped spread the value of collateralized
flows (if any) are stripped from the bond. In the case of a bond with principal
collateral, the present value of the collateral is discounted using US Treasury
Strip rates and subtracted from the price of the bond. To calculate the Stripped
Spread the zero curve is then parallel shifted upwards and used to discount the
remaining unsecured flows until the present value of the cashflows equals the
ex-collateral price of the bond. The number of basis points the curve must be
shifted upwards is called the Stripped Spread.
16
December 2004

Gloria M. Kim (1-212) 834-4153
Jennie Byun (1-212) 834-4029

Alvin Ying (1-212) 834-7139

Stripped Spread is the value of Z such that market value of portfolio equals
[(CFt)/ (1+ Rt +Z)t]
where
CFt
cashflow at time t
Rt
zero-coupon rate at the t- year point of the curve
This calculation is also valid for uncollateralized bonds.

For Emerging Markets sovereign bonds, the stripped spread is more commonly
known as Sovereign Spread. Stripped spread is calculated using offer side
prices. Note that stripped spread of the index does NOT equal to the market
cap weighted average of individual bond spreads.
Composite level yields and spreads
The calculation methodology for index level yields and spreads are the same as
at the instrument level. Cashflows from all the individual bonds in the portfolio
are added up to create a single superbond. The yield and spread for this
superbond is then calculated as described above for the single instrument. Note
that the result will be different from the market capitalization weighted spread
derived from individual bonds in the portfolio.
IV. Other Index Metrics

Effective Interest Rate (EIR) Duration: Measure of sensitivity of dirty price
with respect to the US Interest Rates parallel shift. It approximately shows the
percentage change of dirty price if all US interest rates change by 100 bps.
Effective Spread Duration: Measure of sensitivity of dirty price with respect
to the sovereign spread movement. It approximately shows the percentage
change of dirty price if stripped spread changes by 100 bps.
Average Life: Weighted average time of principal repayment. For nonamortizing bonds, the average life is equal to the years to maturity of the bond.
V. Credit Quality
With the launch of the EMBI Credit Subindices in April 2002, JPMorgan
categorizes and calculates analytics on four distinct credit buckets: Investment
Grade, BB, B and Residual (CCC+ and below) subindex. Where we publish
index statistics for ratings-based subindices, we take the higher of the S&P and
Moodys ratings to determine an instruments ratings category.
December 2004
17
JPMorgan Emerging Markets Research Contact Information

Joyce Chang, Global Head of Emerging Markets Research, Foreign Exchange, and Commodities (1-212) 834-4203
joyce.chang@jpmorgan.com
G LOBAL S TRATEGY
jonathan.bayliss@jpmorgan.com
MD, Global Head of Quantitative Strategy
ignacio.a.ponce.de.leon@jpmorgan.com MD, Corporate Strategy
AND
Q UANTITATIVE A NALYSIS
(44-20) 7777-3020
VP, Index Management
(1-212) 834-4153
(1-212) 834-4214
Assoc, Index Management
(1-212) 834-4029
(44-20) 7777-3582
jarrad.k.linzie@jpmorgan.com
(1-212) 834-7041
victoria.miles@jpmorgan.com
VP, Corporate Strategy (Banks)
stuart.sclater-booth@jpmorgan.com
VP, Relative Value Strategy
(1-212) 834-4439
(1-212) 834-7139
shahzad.hasan@jpmorgan.com
Assoc, Relative Value Strategy
(1-212) 834-4210
ann.m.fausto@jpmorgan.com
Analyst, Analytics
(1-212) 834-7037
frank.zheng@jpmorgan.com
VP, Relative Value Strategy,
(44-20) 7777-0070
frankie.lopez@jpmorgan.com
Assoc, Analytics
(1-212) 834-7190
victor.dituro@jpmorgan.com
VP, Analytics
karim_pakravan@bankone.com
VP, FX Strategist
(1-312) 325-3164
(1-212) 834-7072
L ATIN A MERICA
drausio.giacomelli@jpmorgan.com
VP, Strategy/Economics (Brazil, Latin

America Local Markets)
(1-212) 834-4685
felipe.q.pianetti@jpmorgan.com
Assoc, Strategy (Brazil Local Markets)
(1-212) 834-4043
luis.oganes@jpmorgan.com
VP, Strategy/Economics (Andean Region)
(1-212) 834-4326
benjamin.h.ramsey@jpmorgan.com
Assoc, Strategy (Dominican Rep and LatAm)
(1-212) 834-4308
eric.torres@jpmorgan.com
Assoc, Strategy (Mexico and Central America) (1-212) 834-4426
alfredo.e.thorne@jpmorgan.com
MD, Strategy/Economics (Mexico and LatAm) (52-55) 5540-9558
vladimir.werning@jpmorgan.com
VP, Strategy/Economics (Argentina and Chile)
david.a.franco@jpmorgan.com
Assoc, Economics (Mexico)
fabio.akira@jpmorgan.com
VP, Economics (Brazil)
(55-11) 3048-3634
julio.c.callegari@jpmorgan.com
Assoc, Economics (Brazil)
(55-11) 3048-3369
florencia.m.vazquez@jpmorgan.com
Assoc, Economics (Argentina)
(54-11) 4348-3405
william.w.perry@jpmorgan.com
VP, Corporate Strategy
(1-212) 834 4302
pablo.mautone@jpmorgan.com
(1-212) 834-4711
E ASTERN E UROPE , M IDDLE E AST

michael.marrese@jpmorgan.com
MD, Strategy/Economics (Emerging Europe,

Russia and Turkey)
(44-20) 7777-4627
francis.beddington@jpmorgan.com
VP, Strategy/Economics (Africa, Middle East) (44-20) 7777-3770
darrell.tonge@jpmorgan.com
VP, Strategy (EEMEA Local Markets)
(44-20) 7777-0185
chuan.woei.lim@jpmorgan.com
Assoc., Strategy (EEMEA Local Markets)
(44-20) 7777-4423
eva.a.sanchez@jpmorgan.com
VP, Strategy/Economics (Turkey, the

Balkans and North Africa)
(44-20) 7777-3672
graham.stock@jpmorgan.com
VP, Strategy (EEMEA FX)
(44-20) 7777-3430
osman.wahid@jpmorgan.com
Assoc., Strategy (EEMEA FX)
(44-20) 7777-1214
AND
(1-212) 834-4144
(52-55) 55-40-9339
A FRICA
yarkin.cebeci@jpmorgan.com
VP, Economics (Turkey, Bulgaria & the Baltics) (90-212) 326-8590
marisa.fassler@jpmorgan.com
Assoc, Economics (South Africa)
(27-11) 507-0376
julia.e.ovanessian@jpmorgan.com
Assoc, Economics (Russia, Bulgaria and

Kazakhstan)
(7-095) 937-7321
nora.szentivanyi@jpmorgan.com
Assoc., Economics (Hungary, Slovakia,

Poland, and Czech Republic)
(44-20) 7777-3981
douglas.krehbiel@jpmorgan.com
VP, Corporate Strategy (Emerging Europe

and Russia)
(44-20) 7325-3522
tatiana.tchembarova@jpmorgan.com
Assoc., Corporate and Bank Strategy

(Emerging Europe and Russia)
(44-20) 7325-7278
E MERGING A SIA
jiwon.c.lim@jpmorgan.com
VP, Economics (Korea)
(82-2) 758-5509
frank.fx.gong@jpmorgan.com
MD, Strategy/Economics (Greater China)
(852) 2800-7006
ben.simpfendorfer@jpmorgan.com
Assoc, Economics (China and Hong Kong)
(852) 2800-7005
yenping.ho@jpmorgan.com
Analyst, Strategy (Asian fx markets)
(852) 2259-6208
pradeep.m.mohinani@jpmorgan.com
(852) 2800-8001
(852) 2800-8008
ci.ci.leung@jpmorgan.com
Assoc, Asian Strategy
(852) 2800-8100
sinbeng.ong@jpmorgan.com
Assoc, Economics (Indonesia and Philippines)
william.c.belchere@jpmorgan.com
MD, Asian Economic Research
david.g.fernandez@jpmorgan.com
VP, Strategy/Economics (Emerging Asia and

the Philippines)
(65) 6882-2461
chia-liang.lian@jpmorgan.com
VP, Strategy/Economics (Singapore, Thailand

and Taiwan)
(65) 6882-2253
simon.klassen@jpmorgan.com
VP, Strategy (Asian local markets)
amy.li@jpmorgan.com
VP, Relative Value Strategy
rajeev.malik@jpmorgan.com
VP, Economics (Malaysia, India and Indonesia)
(852) 2800-7000
(65) 6882-2375
If you would like to be included on our distribution list, or if your e-mail address has changed, please contact Susan at
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Copyright 2004 JPMorgan Chase & Co. All rights reserved. Additional information available upon request. Revised November 12, 2004.

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