Solutions For the benchmark maturity sectors in the United States Treasury bill markets,

Size: px
Start display at page:

Download "Solutions 2. 1. For the benchmark maturity sectors in the United States Treasury bill markets,"

Transcription

1 FIN 472 Professor Robert Hauswald Fixed-Income Securities Kogod School of Business, AU Solutions 2 1. For the benchmark maturity sectors in the United States Treasury bill markets, Bloomberg reported the following information. Calculate the missing information. Show all the formulas used and the mechanics of your calculations. Settlement Date was August 31, Benchmark Maturity Date Discount Yield BEY PRICE Three-month 11/29/ %???????? Six-month 02/28/2008???? 4.21%???? 2. For all the benchmark Treasury coupon securities Bloomberg reported the following information. Fill out the missing information. Show all relevant calculations. Settlement

2 Date was August 31, Prices are quoted in 32nds. Show the formulas that you have used. Benchmark Coupon Maturity Date YTM Accrued Clean Price Dirty Price Two-year 4.00% 8/31/ %???????????? Three-year 4.50% 5/15/ %???????????? Five-year 4.125% 8/31/2012???????? ???? Ten-year 4.75% 8/15/2017???????? ???? Thirty-year 5.00% 5/15/ %????????????

3 3. Refer to problem 2. You need to hedge a long position in $ million par value of the current benchmark 2-year T-note. You decide to use the current benchmark 5-year T-note to perform the hedge. Explain intuitively how you will go about setting up this hedge. What is the implied view taken on the yield curve when the hedge is put in place? Long position in the 2-year note will lose money when the interest rates go up (prices go down), and make money when the interest rates go down (prices go up). Hence in order to hedge, you must short the 5-year note, which will make money when the interest rates go up and vice versa. A $ million par value position (long) in 2-year note will probably require the shorting of less than $ million par of the 5-year note. This is due to the fact that the 5-year note is more sensitive to interest rates than are 2-year notes. Since the hedge is long in 2-year and short in 5-year, the hedged position will make money if the yield curve were to become steeper. 4. An investor buys a face amount $1 million of a six-month (182 days) Treasury bill at a discount yield of 9.25 percent. What is the cost of purchasing these bills? Calculate the bond equivalent yield. Indicate clearly the formula you used and show all the steps in your calculations. Recalculate the bond equivalent yield if the T-bill has a maturity of 275 days. Cost of T-bill: The discount rate per $ face amount is given by the following formula. ( - P) 360 d =, (2.1) n

4 n = 182, d = 9.25% or Substituting these values and solving for P we get P = or, $953, invoice price per million. Bond equivalent yield calculated using Equation (2.2) is ( - P) 365 BEY =. (2.2) n Setting n = 182 and P = in Equation (2.2) we get BEY = 9.38% for 182- day maturity. The BEY for the same bond but with a 275- day maturity is calculated by first computing the price of the T-bill, P = 1 = Using this price we calculate the BEY as BEY = = % On November 18, 1987, a 7 7 /8% T-bond maturing on May 15, 1990 was quoted at /33 for settlement on November 20, The last coupon was paid on November 15, (a) What is the invoice price of the T-bond? (b) What is the yield on the T-bond? (a) Invoice price: Invoice price is flat price plus accrued interest. We calculate accrued interest as follows.

5 ai = = (2.3) Invoice price = quoted price + accrued; or, in this case, = (b) Yield to maturity: Using the price-yield formula, we may find the yield to maturity. In order to calculate the yield to maturity we use the formula in Chapter 2, which is reproduced below: P t = 1+ y 2 N 1+ z x + j= N 1 j= 0 C 2 1+ y 2 j + z x. In the context of this problem, we have the following: The number of days between the last coupon date (11/15/87) and the settlement date (11/20/87) is 5 days. The basis is the number of days between the last coupon date and the next coupon date (5/15/88) and is equal to 182 days. Hence z = 177 days. The accrued interest is 5 /182( /2) = The number of coupons remaining is N = 5. Note that z /x = 177 /182 = The full price of the bond is / =.014. Using the formula we get.014 = y j= j j= y Solving for the yield to maturity, we get y = %. 6. What is the price of a 10-year zero-coupon bond priced to yield 10% under each of the following assumptions? (a) Annual yield.

6 (b) Semiannual yield. (c) Monthly yield. (d) Daily yield. Explain the differences you found. What is the continuous limit? a) Annual yield P = = (2.4) 10 (1.1) b) Semiannual yield P = = (2.5) 20 (1.05) c) Monthly yield P = = (2.6) d) Daily yield P = = (2.7) For the continuous limit, we apply the formula: P 10 e = = ( 0.1)

Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates

Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Cash Flow Financial transactions and investment opportunities are described by cash flows they generate. Cash flow: payment

More information

Interest Rate Futures. Chapter 6

Interest Rate Futures. Chapter 6 Interest Rate Futures Chapter 6 1 Day Count Convention The day count convention defines: The period of time to which the interest rate applies. The period of time used to calculate accrued interest (relevant

More information

FIN 472 Fixed-Income Securities Debt Instruments

FIN 472 Fixed-Income Securities Debt Instruments FIN 472 Fixed-Income Securities Debt Instruments Professor Robert B.H. Hauswald Kogod School of Business, AU The Most Famous Bond? Bond finance raises the most money fixed income instruments types of bonds

More information

FIN 684 Fixed-Income Analysis From Repos to Monetary Policy. Funding Positions

FIN 684 Fixed-Income Analysis From Repos to Monetary Policy. Funding Positions FIN 684 Fixed-Income Analysis From Repos to Monetary Policy Professor Robert B.H. Hauswald Kogod School of Business, AU Funding Positions Short-term funding: repos and money markets funding trading positions

More information

Fixed Income: Practice Problems with Solutions

Fixed Income: Practice Problems with Solutions Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semi-annual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars.

More information

FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

More information

Fixed Income Knowledge Series 2. Characteristics and Pricing of Government Bonds

Fixed Income Knowledge Series 2. Characteristics and Pricing of Government Bonds Fixed Income Knowledge Series 2 Characteristics and Pricing of Government Bonds Government bonds are fixed income securities issued by the Government of India (GOI). The total outstanding bonds issued

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 1. Expectations hypothesis. The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping curve is

More information

FNCE 301, Financial Management H Guy Williams, 2006

FNCE 301, Financial Management H Guy Williams, 2006 REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including

More information

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES Chapter - The Term Structure of Interest Rates CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

More information

Mid-Term Exam Practice Set and Solutions.

Mid-Term Exam Practice Set and Solutions. FIN-469 Investments Analysis Professor Michel A. Robe Mid-Term Exam Practice Set and Solutions. What to do with this practice set? To help students prepare for the mid-term exam, two practice sets with

More information

Bond Price Arithmetic

Bond Price Arithmetic 1 Bond Price Arithmetic The purpose of this chapter is: To review the basics of the time value of money. This involves reviewing discounting guaranteed future cash flows at annual, semiannual and continuously

More information

Chapter Nine Selected Solutions

Chapter Nine Selected Solutions Chapter Nine Selected Solutions 1. What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the

More information

In this chapter we will learn about. Treasury Notes and Bonds, Treasury Inflation Protected Securities,

In this chapter we will learn about. Treasury Notes and Bonds, Treasury Inflation Protected Securities, 2 Treasury Securities In this chapter we will learn about Treasury Bills, Treasury Notes and Bonds, Strips, Treasury Inflation Protected Securities, and a few other products including Eurodollar deposits.

More information

Practice Set #4: T-Bond & T-Note futures.

Practice Set #4: T-Bond & T-Note futures. Derivatives (3 credits) Professor Michel Robe Practice Set #4: T-Bond & T-Note futures. What to do with this practice set? To help students with the material, eight practice sets with solutions shall be

More information

FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

More information

Term Structure of Interest Rates

Term Structure of Interest Rates Appendix 8B Term Structure of Interest Rates To explain the process of estimating the impact of an unexpected shock in short-term interest rates on the entire term structure of interest rates, FIs use

More information

Chapter. Bond Prices and Yields. McGraw-Hill/Irwin. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter. Bond Prices and Yields. McGraw-Hill/Irwin. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Bond Prices and Yields McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Bond Prices and Yields Our goal in this chapter is to understand the relationship

More information

Problems and Solutions

Problems and Solutions Problems and Solutions CHAPTER Problems. Problems on onds Exercise. On /04/0, consider a fixed-coupon bond whose features are the following: face value: $,000 coupon rate: 8% coupon frequency: semiannual

More information

Zero-Coupon Bonds (Pure Discount Bonds)

Zero-Coupon Bonds (Pure Discount Bonds) Zero-Coupon Bonds (Pure Discount Bonds) The price of a zero-coupon bond that pays F dollars in n periods is F/(1 + r) n, where r is the interest rate per period. Can meet future obligations without reinvestment

More information

Chapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23.

Chapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23. Chapter 8 Bond Valuation with a Flat Term Structure 1. Suppose you want to know the price of a 10-year 7% coupon Treasury bond that pays interest annually. a. You have been told that the yield to maturity

More information

Exam 1 Morning Session

Exam 1 Morning Session 91. A high yield bond fund states that through active management, the fund s return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark

More information

Fixed-Income Securities. Assignment

Fixed-Income Securities. Assignment FIN 472 Professor Robert B.H. Hauswald Fixed-Income Securities Kogod School of Business, AU Assignment Please be reminded that you are expected to use contemporary computer software to solve the following

More information

Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions.

Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions. Bond Pricing - 1 Chapter 11 Several Assumptions: To simplify the analysis, we make the following assumptions. 1. The coupon payments are made every six months. 2. The next coupon payment for the bond is

More information

Chapter 8 Interest Rates and Bond Valuation

Chapter 8 Interest Rates and Bond Valuation University of Science and Technology Beijing Dongling School of Economics and management Chapter 8 Interest Rates and Bond Valuation Oct. 2012 Dr. Xiao Ming USTB 1 Key Concepts and Skills Know the important

More information

Yield Measures, Spot Rates & Forward Rates

Yield Measures, Spot Rates & Forward Rates Fixed Income Yield Measures, Spot Rates & Forward Rates Reading - 57 www.proschoolonline.com/ 1 Sources of Return Coupon interest payment: Periodic coupon interest is paid on the par value of the bond

More information

Practice Set #2 and Solutions.

Practice Set #2 and Solutions. FIN-672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #2 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams,

More information

Debt Instruments Set 2

Debt Instruments Set 2 Debt Instruments Set 2 Backus/October 29, 1998 Bond Arithmetic 0. Overview Zeros and coupon bonds Spot rates and yields Day count conventions Replication and arbitrage Forward rates Yields and returns

More information

BOND FUTURES. 1. Terminology... 2 2. Application... 11. FINANCE TRAINER International Bond Futures / Page 1 of 12

BOND FUTURES. 1. Terminology... 2 2. Application... 11. FINANCE TRAINER International Bond Futures / Page 1 of 12 BOND FUTURES 1. Terminology... 2 2. Application... 11 FINANCE TRAINER International Bond Futures / Page 1 of 12 1. Terminology A future is a contract to either sell or buy a certain underlying on a specified

More information

Math of Finance. Texas Association of Counties January 2014

Math of Finance. Texas Association of Counties January 2014 Math of Finance Texas Association of Counties January 2014 Money Market Securities Sample Treasury Bill Quote*: N Bid Ask Ask Yld 126 4.86 4.85 5.00 *(Yields do not reflect current market conditions) Bank

More information

FIN 683 Financial Institutions Management Interest-Rate Risk

FIN 683 Financial Institutions Management Interest-Rate Risk FIN 683 Financial Institutions Management Interest-Rate Risk Professor Robert B.H. Hauswald Kogod School of Business, AU Interest Rate Risk FIs (financial institutions or intermediaries) face two core

More information

Overview of Lecture 5 (part of Lecture 4 in Reader book)

Overview of Lecture 5 (part of Lecture 4 in Reader book) Overview of Lecture 5 (part of Lecture 4 in Reader book) Bond price listings and Yield to Maturity Treasury Bills Treasury Notes and Bonds Inflation, Real and Nominal Interest Rates M. Spiegel and R. Stanton,

More information

Answers to End-of-Chapter Questions

Answers to End-of-Chapter Questions Answers to End-of-Chapter Questions 1. The bond with a C rating should have a higher risk premium because it has a higher default risk, which reduces its demand and raises its interest rate relative to

More information

ACI THE FINANCIAL MARKETS ASSOCIATION

ACI THE FINANCIAL MARKETS ASSOCIATION ACI THE FINANCIAL MARKETS ASSOCIATION EXAMINATION FORMULAE 2009 VERSION page number INTEREST RATE..2 MONEY MARKET..... 3 FORWARD-FORWARDS & FORWARD RATE AGREEMENTS..4 FIXED INCOME.....5 FOREIGN EXCHANGE

More information

Alliance Consulting BOND YIELDS & DURATION ANALYSIS. Bond Yields & Duration Analysis Page 1

Alliance Consulting BOND YIELDS & DURATION ANALYSIS. Bond Yields & Duration Analysis Page 1 BOND YIELDS & DURATION ANALYSIS Bond Yields & Duration Analysis Page 1 COMPUTING BOND YIELDS Sources of returns on bond investments The returns from investment in bonds come from the following: 1. Periodic

More information

Global Financial Management

Global Financial Management Global Financial Management Bond Valuation Copyright 999 by Alon Brav, Campbell R. Harvey, Stephen Gray and Ernst Maug. All rights reserved. No part of this lecture may be reproduced without the permission

More information

LOS 56.a: Explain steps in the bond valuation process.

LOS 56.a: Explain steps in the bond valuation process. The following is a review of the Analysis of Fixed Income Investments principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: Introduction

More information

Calculation Convention for Inflation Linked Bond

Calculation Convention for Inflation Linked Bond Calculation Convention for Inflation Linked Bond Bond Pricing and Product Development The Thai Bond Market Association (ThaiBMA) Introduction In May 0, Thai bond market will probably have a new type of

More information

Asset Valuation Debt Investments: Analysis and Valuation

Asset Valuation Debt Investments: Analysis and Valuation Asset Valuation Debt Investments: Analysis and Valuation Joel M. Shulman, Ph.D, CFA Study Session # 15 Level I CFA CANDIDATE READINGS: Fixed Income Analysis for the Chartered Financial Analyst Program:

More information

Financial-Institutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure:

Financial-Institutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure: FIN 683 Professor Robert Hauswald Financial-Institutions Management Kogod School of Business, AU Solutions 1 Chapter 7: Bank Risks - Interest Rate Risks 6. A financial institution has the following market

More information

ANALYSIS OF FIXED INCOME SECURITIES

ANALYSIS OF FIXED INCOME SECURITIES ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its

More information

MONEY MARKET SUBCOMMITEE(MMS) FLOATING RATE NOTE PRICING SPECIFICATION

MONEY MARKET SUBCOMMITEE(MMS) FLOATING RATE NOTE PRICING SPECIFICATION MONEY MARKET SUBCOMMITEE(MMS) FLOATING RATE NOTE PRICING SPECIFICATION This document outlines the use of the margin discounting methodology to price vanilla money market floating rate notes as endorsed

More information

Bond valuation. Present value of a bond = present value of interest payments + present value of maturity value

Bond valuation. Present value of a bond = present value of interest payments + present value of maturity value Bond valuation A reading prepared by Pamela Peterson Drake O U T L I N E 1. Valuation of long-term debt securities 2. Issues 3. Summary 1. Valuation of long-term debt securities Debt securities are obligations

More information

2. What is your best estimate of what the price would be if the riskless interest rate was 9% (compounded semi-annually)? (1.04)

2. What is your best estimate of what the price would be if the riskless interest rate was 9% (compounded semi-annually)? (1.04) Lecture 4 1 Bond valuation Exercise 1. A Treasury bond has a coupon rate of 9%, a face value of $1000 and matures 10 years from today. For a treasury bond the interest on the bond is paid in semi-annual

More information

Practice Set and Solutions #2

Practice Set and Solutions #2 723G26/2012-10-10 Practice Set and Solutions #2 What to do with this practice set? Practice sets are handed out to help students master the material of the course and prepare for the final exam. These

More information

550.444 Introduction to Financial Derivatives

550.444 Introduction to Financial Derivatives 550.444 Introduction to Financial Derivatives Week of October 7, 2013 Interest Rate Futures Where we are Last week: Forward & Futures Prices/Value (Chapter 5, OFOD) This week: Interest Rate Futures (Chapter

More information

Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity

Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity Fixed Income ortfolio Management Interest rate sensitivity, duration, and convexity assive bond portfolio management Active bond portfolio management Interest rate swaps 1 Interest rate sensitivity, duration,

More information

NATIONAL STOCK EXCHANGE OF INDIA LIMITED

NATIONAL STOCK EXCHANGE OF INDIA LIMITED NATIONAL STOCK EXCHANGE OF INDIA LIMITED Capital Market FAQ on Corporate Bond Date : September 29, 2011 1. What are securities? Securities are financial instruments that represent a creditor relationship

More information

Bond Market Overview and Bond Pricing

Bond Market Overview and Bond Pricing Bond Market Overview and Bond Pricing. Overview of Bond Market 2. Basics of Bond Pricing 3. Complications 4. Pricing Floater and Inverse Floater 5. Pricing Quotes and Accrued Interest What is A Bond? Bond:

More information

U.S. Treasury Securities

U.S. Treasury Securities U.S. Treasury Securities U.S. Treasury Securities 4.6 Nonmarketable To help finance its operations, the U.S. government from time to time borrows money by selling investors a variety of debt securities

More information

Bond Pricing Fundamentals

Bond Pricing Fundamentals Bond Pricing Fundamentals Valuation What determines the price of a bond? Contract features: coupon, face value (FV), maturity Risk-free interest rates in the economy (US treasury yield curve) Credit risk

More information

Bond valuation and bond yields

Bond valuation and bond yields RELEVANT TO ACCA QUALIFICATION PAPER P4 AND PERFORMANCE OBJECTIVES 15 AND 16 Bond valuation and bond yields Bonds and their variants such as loan notes, debentures and loan stock, are IOUs issued by governments

More information

Chapter 3 Fixed Income Securities

Chapter 3 Fixed Income Securities Chapter 3 Fixed Income Securities Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixed-income securities. Stocks. Real assets (capital budgeting). Part C Determination

More information

Fixed-Income Securities Lecture 4: Hedging Interest Rate Risk Exposure Traditional Methods

Fixed-Income Securities Lecture 4: Hedging Interest Rate Risk Exposure Traditional Methods Fixed-Income Securities Lecture 4: Hedging Interest Rate Risk Exposure Traditional Methods Philip H. Dybvig Washington University in Saint Louis Matching maturities Duration Effective duration Multiple

More information

Problems and Solutions

Problems and Solutions 1 CHAPTER 1 Problems 1.1 Problems on Bonds Exercise 1.1 On 12/04/01, consider a fixed-coupon bond whose features are the following: face value: $1,000 coupon rate: 8% coupon frequency: semiannual maturity:

More information

Questions and Answers

Questions and Answers Appendix J 1 Series EE Savings Bonds Issued May 2005 and Thereafter What interest rate does a Series EE bond earn? Series EE savings bonds issued on and after May 1, 2005, will earn a fixed rate of interest,

More information

Spot rates, forward rates and plot of the term structure of interest rate.

Spot rates, forward rates and plot of the term structure of interest rate. A N A L Y T I C A L F I N A N C E I I BILLS, NOTES AND BONDS MARKETS: Spot rates, forward rates and plot of the term structure of interest rate FOTSING ARMAND HAMADOU H TAKOETA FRED 1 INTRODUCTION: 3 11

More information

Bodie, Kane, Marcus, Perrakis and Ryan, Chapter 2

Bodie, Kane, Marcus, Perrakis and Ryan, Chapter 2 Bodie, Kane, Marcus, Perrakis and Ryan, Chapter 2 Answers to Selected Problems 1. The following multiple-choice problems are based on questions that have appeared in past CFA examinations. a A firm s preferred

More information

7. Bonds and Interest rates

7. Bonds and Interest rates 7. Bonds and Interest rates 1 2 Yields and rates I m thinking of buying a bond that has a face value of $1000, pays semiannual coupons of $40 and has 7 years to maturity. The market price is $943. Fixed

More information

CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING

CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING Topic One: Bond Pricing Principles 1. Present Value. A. The present-value calculation is used to estimate how much an investor should pay for a bond;

More information

Understanding duration and convexity of fixed income securities. Vinod Kothari

Understanding duration and convexity of fixed income securities. Vinod Kothari Understanding duration and convexity of fixed income securities Vinod Kothari Notation y : yield p: price of the bond T: total maturity of the bond t: any given time during T C t : D m : Cashflow from

More information

FIXED INCOME. FINANCE TRAINER International Fixed Income / Page 1 of 48

FIXED INCOME. FINANCE TRAINER International Fixed Income / Page 1 of 48 FIXED INCOME. The Bond Market... 2. Different Criteria for Bonds... 3.2 Common Bonds and Their Abbreviations and Conventions (Excurus)... 7 Interest payments... 8.3 Associations, Abbreviations and Terms

More information

Exhibit 1. Swaps Correlate More Closely with Corporates than Treasuries Do

Exhibit 1. Swaps Correlate More Closely with Corporates than Treasuries Do CBOT Interest Rate wap Complex The Tools of Your Trade Hedging a Fixed-Income Portfolio with Swap Futures The addition of 5-year and 10-year interest rate swap futures to the CBOT interest rate futures

More information

ANSWERS TO STUDY QUESTIONS

ANSWERS TO STUDY QUESTIONS ANSWERS TO STUDY QUESTIONS Chapter 17 17.1. The details are described in section 17.1.1. 17.3. Because of its declining payment pattern, a CAM would be most useful in an economy with persistent deflation

More information

FINANCIAL MATHEMATICS FIXED INCOME

FINANCIAL MATHEMATICS FIXED INCOME FINANCIAL MATHEMATICS FIXED INCOME 1. Converting from Money Market Basis to Bond Basis and vice versa 2 2. Calculating the Effective Interest Rate (Non-annual Payments)... 4 3. Conversion of Annual into

More information

ILLUSTRATING SPOT AND FORWARD INTEREST RATES Learning Curve August 2003

ILLUSTRATING SPOT AND FORWARD INTEREST RATES Learning Curve August 2003 ILLUSTRATING SPOT AND FORWARD INTEREST RATES Learning Curve August 003 Practitioners in the bond markets need to determine the true interest rate for any period or term to maturity, for a number of applications.

More information

Interest Rate Options

Interest Rate Options Interest Rate Options A discussion of how investors can help control interest rate exposure and make the most of the interest rate market. The Chicago Board Options Exchange (CBOE) is the world s largest

More information

Finance for Cultural Organisations Lecture 5. Interest Rates and Bond Valuation

Finance for Cultural Organisations Lecture 5. Interest Rates and Bond Valuation Finance for Cultural Organisations Lecture 5. Interest Rates and Bond Valuation Lecture 5: Interest Rates and Bond Valuation Know the important bond features and bond types Understand bond values and why

More information

Bonds, Preferred Stock, and Common Stock

Bonds, Preferred Stock, and Common Stock Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1-year discount bond with a $100 face value. What is the most the investor would pay for 2. An

More information

Bonds and Yield to Maturity

Bonds and Yield to Maturity Bonds and Yield to Maturity Bonds A bond is a debt instrument requiring the issuer to repay to the lender/investor the amount borrowed (par or face value) plus interest over a specified period of time.

More information

APPENDIX: FINANCIAL CALCULATIONS

APPENDIX: FINANCIAL CALCULATIONS APPENDIX: FINANCIAL CALCULATIONS Transactions in money and fixed-interest markets are based on financial calculations of the price of and return on securities. These calculations are often based on esoteric

More information

Investment Yield Formulas and Yield Case Studies

Investment Yield Formulas and Yield Case Studies Investment Yield Formulas and Yield Case Studies Presented by : Gary Porter, C.F.A. Vice President Capital Management of the Carolinas, LLC distributors of the North Carolina Capital Management Trust Email:

More information

Chapter 6 Interest Rates and Bond Valuation

Chapter 6 Interest Rates and Bond Valuation Chapter 6 Interest Rates and Bond Valuation Solutions to Problems P6-1. P6-2. LG 1: Interest Rate Fundamentals: The Real Rate of Return Basic Real rate of return = 5.5% 2.0% = 3.5% LG 1: Real Rate of Interest

More information

FINANCIAL MATHEMATICS MONEY MARKET

FINANCIAL MATHEMATICS MONEY MARKET FINANCIAL MATHEMATICS MONEY MARKET 1. Methods of Interest Calculation, Yield Curve and Quotation... 2 1.1 Methods to Calculate Interest... 2 1.2 The Yield Curve... 6 1.3 Interpolation... 8 1.4 Quotation...

More information

Lecture 09: Multi-period Model Fixed Income, Futures, Swaps

Lecture 09: Multi-period Model Fixed Income, Futures, Swaps Lecture 09: Multi-period Model Fixed Income, Futures, Swaps Prof. Markus K. Brunnermeier Slide 09-1 Overview 1. Bond basics 2. Duration 3. Term structure of the real interest rate 4. Forwards and futures

More information

Chapter. Interest Rates. McGraw-Hill/Irwin. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter. Interest Rates. McGraw-Hill/Irwin. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Interest Rates McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Interest Rates Our goal in this chapter is to discuss the many different interest rates that

More information

CHAPTER 14: BOND PRICES AND YIELDS

CHAPTER 14: BOND PRICES AND YIELDS CHAPTER 14: BOND PRICES AND YIELDS 1. a. Effective annual rate on 3-month T-bill: ( 100,000 97,645 )4 1 = 1.02412 4 1 =.10 or 10% b. Effective annual interest rate on coupon bond paying 5% semiannually:

More information

Interest Rate and Credit Risk Derivatives

Interest Rate and Credit Risk Derivatives Interest Rate and Credit Risk Derivatives Interest Rate and Credit Risk Derivatives Peter Ritchken Kenneth Walter Haber Professor of Finance Weatherhead School of Management Case Western Reserve University

More information

VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS

VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Graduate School of Business Administration University of Virginia VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Interest-rate swaps have grown tremendously over the last 10 years. With this development,

More information

Answers to Review Questions

Answers to Review Questions Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual

More information

, plus the present value of the $1,000 received in 15 years, which is 1, 000(1 + i) 30. Hence the present value of the bond is = 1000 ;

, plus the present value of the $1,000 received in 15 years, which is 1, 000(1 + i) 30. Hence the present value of the bond is = 1000 ; 2 Bond Prices A bond is a security which offers semi-annual* interest payments, at a rate r, for a fixed period of time, followed by a return of capital Suppose you purchase a $,000 utility bond, freshly

More information

CHAPTER 7 INTEREST RATES AND BOND VALUATION

CHAPTER 7 INTEREST RATES AND BOND VALUATION CHAPTER 7 INTEREST RATES AND BOND VALUATION Answers to Concepts Review and Critical Thinking Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury

More information

CHAPTER 10 BOND PRICES AND YIELDS

CHAPTER 10 BOND PRICES AND YIELDS CHAPTER 10 BOND PRICES AND YIELDS 1. a. Catastrophe bond. Typically issued by an insurance company. They are similar to an insurance policy in that the investor receives coupons and par value, but takes

More information

Yield-bearing Financial Assets

Yield-bearing Financial Assets Yield-bearing Financial Assets (YBFAs) The quiet market (until lately) (c) 2009-2013, Gary R. Evans. May be used only for non-profit educational purposes only without permission of the author. Primary

More information

Trading the Yield Curve. Copyright 1999-2006 Investment Analytics

Trading the Yield Curve. Copyright 1999-2006 Investment Analytics Trading the Yield Curve Copyright 1999-2006 Investment Analytics 1 Trading the Yield Curve Repos Riding the Curve Yield Spread Trades Coupon Rolls Yield Curve Steepeners & Flatteners Butterfly Trading

More information

Coupon Bonds and Zeroes

Coupon Bonds and Zeroes Coupon Bonds and Zeroes Concepts and Buzzwords Coupon bonds Zero-coupon bonds Bond replication No-arbitrage price relationships Zero rates Zeroes STRIPS Dedication Implied zeroes Semi-annual compounding

More information

Introduction to Fixed Income (IFI) Course Syllabus

Introduction to Fixed Income (IFI) Course Syllabus Introduction to Fixed Income (IFI) Course Syllabus 1. Fixed income markets 1.1 Understand the function of fixed income markets 1.2 Know the main fixed income market products: Loans Bonds Money market instruments

More information

Chapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.)

Chapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.) Chapter 6 Interest Rates And Bond Valuation Learning Goals 1. Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. 2. Review the legal aspects of bond financing

More information

FIXED-INCOME SECURITIES. Chapter 10. Swaps

FIXED-INCOME SECURITIES. Chapter 10. Swaps FIXED-INCOME SECURITIES Chapter 10 Swaps Outline Terminology Convention Quotation Uses of Swaps Pricing of Swaps Non Plain Vanilla Swaps Terminology Definition Agreement between two parties They exchange

More information

Review for Exam 1. Instructions: Please read carefully

Review for Exam 1. Instructions: Please read carefully Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

More information

I. Readings and Suggested Practice Problems. II. Risks Associated with Default-Free Bonds

I. Readings and Suggested Practice Problems. II. Risks Associated with Default-Free Bonds Prof. Alex Shapiro Lecture Notes 13 Bond Portfolio Management I. Readings and Suggested Practice Problems II. Risks Associated with Default-Free Bonds III. Duration: Details and Examples IV. Immunization

More information

Interest Rates and Bond Valuation

Interest Rates and Bond Valuation Interest Rates and Bond Valuation Chapter 6 Key Concepts and Skills Know the important bond features and bond types Understand bond values and why they fluctuate Understand bond ratings and what they mean

More information

EC247 FINANCIAL INSTRUMENTS AND CAPITAL MARKETS TERM PAPER

EC247 FINANCIAL INSTRUMENTS AND CAPITAL MARKETS TERM PAPER EC247 FINANCIAL INSTRUMENTS AND CAPITAL MARKETS TERM PAPER NAME: IOANNA KOULLOUROU REG. NUMBER: 1004216 1 Term Paper Title: Explain what is meant by the term structure of interest rates. Critically evaluate

More information

Practice Set #1 and Solutions.

Practice Set #1 and Solutions. Bo Sjö 14-05-03 Practice Set #1 and Solutions. What to do with this practice set? Practice sets are handed out to help students master the material of the course and prepare for the final exam. These sets

More information

Notes for Lecture 3 (February 14)

Notes for Lecture 3 (February 14) INTEREST RATES: The analysis of interest rates over time is complicated because rates are different for different maturities. Interest rate for borrowing money for the next 5 years is ambiguous, because

More information

Risk and Return in the Canadian Bond Market

Risk and Return in the Canadian Bond Market Risk and Return in the Canadian Bond Market Beyond yield and duration. Ronald N. Kahn and Deepak Gulrajani (Reprinted with permission from The Journal of Portfolio Management ) RONALD N. KAHN is Director

More information

Bonds. Describe Bonds. Define Key Words. Created 2007 By Michael Worthington Elizabeth City State University

Bonds. Describe Bonds. Define Key Words. Created 2007 By Michael Worthington Elizabeth City State University Bonds OBJECTIVES Describe bonds Define key words Explain why bond prices fluctuate Compute interest payments Calculate the price of bonds Created 2007 By Michael Worthington Elizabeth City State University

More information

Bond Pricing Problems with YTM YTM is the stated internal rate of return It is not guaranteed to be the realized return due to interest rate risk It may not be a correct description of expected

More information

C(t) (1 + y) 4. t=1. For the 4 year bond considered above, assume that the price today is 900$. The yield to maturity will then be the y that solves

C(t) (1 + y) 4. t=1. For the 4 year bond considered above, assume that the price today is 900$. The yield to maturity will then be the y that solves Economics 7344, Spring 2013 Bent E. Sørensen INTEREST RATE THEORY We will cover fixed income securities. The major categories of long-term fixed income securities are federal government bonds, corporate

More information