Yields, Swaps, &CorporateFinance
|
|
- Audra Shaw
- 8 years ago
- Views:
Transcription
1 &CorporateFinance Financing Tactics Teaching with Bloomberg Exelon Center Finance Labs Conference University of Delaware August 2013
2 Gratitude Thanks, Rich, for our Conference. Thanks to all of you for the opportunity to show you some of my teaching ideas.
3 Stage setting The teaching application I have to share is from an undergraduate capstone course, Advanced Corporate Finance. As a capstone, the point is to integrate the students prior learning and send them on their way to apply it. Especially, the course links financial markets to corporate finance applications. This application specifically links yields and interest rates to swaps to corporate financing opportunities.
4 Outline Swap Manager intro The value of fair value 4 Benchmarking borrowing costs Application to fixed rate loans 5
5 Thoughts on a teaching approach Never miss the chance to reinforce and link the basics to practice; Everything I needed to know I learned in... Example: poster assigned as pre-work, review in a prior class or podcast Bloomberg analytics apps build finance concepts into practical form, e.g., as in Swap Manager for swap pricing The details can be a bit intense, but also open doors for extended study later Markets solve problems...interest rate and swap markets solve corporate finance problems Market information is of practical help even for those who may never transact in the specific market
6 Bloomberg's curve finder -- type CRVF <Go> -- provides access to a long list of yield curves. you can search by keyword, or lookup by country. Bloomberg refers to the curves by ID number. Prominent curves are the I25 US Treasury yield curve, and the S23 US dollar denominated swaps curve (of which more elsewhere on this page). When you know the curve you want, one way to get started with it is to type GC <Go>, for "Graph curves." You can then enter the ID number of the curve that interests you, and obtain a chart. The rest of this page is to help you understand some of the key yield curves you will want to use. This GC graph shows the I25 Treasury "actives" yield curve, which has coupon-paying T bond YTMs. The chart also shows the yield curve for Treasury Strips. A Treasury Strip is a pure-discount (zerocoupon) bond version of a TBond, with only one cash flow, at maturity time. The Strips curve is one case of a spot curve. One way to think about a coupon bond is that it is really a collection of strips or zeros, engineered to have just the right payouts at each time. What are spot curves useful for? When you know the yield off the spot curve, you know how to form the present value of a dollar received at that date. Just form the discount factor (i.e., (1+SpotYield)^-N). If the curve is for riskless bonds, the PV is for a risk free dollar. If the curve is for, e.g., AA bonds, then the PV is for a dollar with that riskiness. What else are spot curves useful for? They are the observed rates from which forward rates of interest can be calculated. Forward rates give insight into the future rates of interest that market participants expect. See the next section for more on this (up and to the right). Questions or comments?, Department of Finance, laux@udel.edu The green lower curve is the I25 Treasury actives coupon paying curve. The blue upper curve is the I39 US Strips curve. The bottom panel shows the spread between the Strips curve and the Treasury actives curve. The spread is always positive. This will always be the case for an upsloped coupon curve. The reason is that the coupon curve is really an average of the spot curve elements for all dates up to the maturity, since the coupon bonds has cash flows at all those dates. The near-in dates have spot curve yields that are lower than the ones that are further out in maturity. The snapshots on this page were taken in March The green top curve is the S23 USD swap curve. The red curve usually in the middle is the I25 coupon Treasury curve. The blue curve at the bottom is the S45 EUR swap curve. The bottom panel shows interest rate differential between the various curves. In this picture, the US swap curve is subtracted from each of the other curves. S23 - I25 would be called the "swap spread," so Bloomberg's red curve (shown by default--i made no special choices on this GC screen) is the negative of the swap spread. (Also note that red and blue have different meanings in the top panel vs. the bottom.) Swaps are usually quoted for a AA credit situation. Thus it may seem natural that USD swap rates are higher than Treasuries. But it needn't be like that, as there are additional considerations. For example, at the long end of the curve, the USD swap rate is lower (the swap spread is negative). Since the swap rate is paid in return for a floating rate, that suggests that market participants expect the floating rate to be quite low, or else that there is low liquidity on the fixed pay side of the market at the long end (allowing fixed rate payers to get a better deal). From spot curves to implied forward rates of interest The chart shows several snapshots of the "forward curve." In order, from top to bottom, they are from 10 years ago (white), 5 years ago (green), 1 year ago (blue, barely visible) and Mar 2013 (now or 'spot'--meaning the spot time not spot curve). Interest rates have been falling all decade long! Swap curves: Plain vanilla interest rate swaps promise the periodic payout (or receipt) of a floating rate cash flow (often at a LIBOR rate) in return for the periodic receipt (or payout) of a fixed rate cash flow. The fixed interest rate used to compute the fixed rate receipt is called the "swap rate." The swap rate is what market participants bargain about, as it sets the present value of the swap. Eyes-wide-open bargaining will lead to a swap with zero NPV at the start. Later, as interest rates change, one party will tend to win or lose as the NPV rises or falls, and the swap becomes "off market" rate. The curves below are swap curves, showing swap rates for plain vanilla swaps of different tenors (or lengths of agreement). In these swaps, the exchanges happen semi-annually. Two swap curves are shown--one relative to EUR LIBOR (with payments in EUR), and one relative to USD LIBOR (with payments in USD). The Treasury curve is shown for comparison. Swap curves depend on both spot and forward curves. They depend on spot curves because future cash flows must be discounted to determined their value---a job for which spot curve rates are well suited. They depend on forward curves because the future payments on the floating leg depend on future interest rates---and forward curves give us a sense for expected future interest rates. The EUR swap rate is generally lower than the USD swap rate, suggesting that payments at that fixed rate in EUR are regarded as quite desirable. One possible reason, just as an example, would be if the USD floating rate is expected to track higher more than the EUR floating rate, making it more attractive (higher demand) to fix payments in EUR terms. The forward curve matrix: Type FWCM <Go>, and specify a curve family, like I23 US Treasury Actives, US Treasury coupon-paying bonds. Note that the implied forward curves are all upward sloping. That suggests that, at each date, the economy has expected interest rates for specific periods farther into the future to be higher than for periods closer to the present. Of course, the succession of curves (each one lower than the previous one) says it has not turned out that way. If the Fed controls rates with monetary policy and QE, this suggests their actions have been unanticipated. Or perhaps market forces, which are harder to anticipate, have been more important. Details of the recent shape and changes in the USD swap curve (at left) and EUR swap curve (above). The long end of the USD swap curve has been steepening slightly lately, suggesting that long term fixed payments are being seen as somewhat less valuable relative to floating rate payment (i.e., so the market requires larger fixed payments to make a fair deal). The big picture of yield curves reinforcing and extending with little pictures: see paper poster... can t use swaps unless can use interest rate reasoning Understanding yield curves, with help from Bloomberg.
7 Next: Bloomberg Swap Manager Start with 5-year plain-vanilla interest rate swap. Type SWPM <Go> to enter Bloomberg's "Swap Manager" facility. Pricing rooted in present values of cash flows forecasted using OIS swap rates as the basis for discount rates and forecasting cash flows based on cash/futures interest rates and yield curves. Three screen regions (red boxes) show each counterparty (leg) details and market pricing. Swap Manager intro The value of fair value Zero premium indicates semiannual USD fixed coupon at 1.778% pa over 5 years is marketvalue-equivalent to quarterly USD LIBOR floating (recently at 0.263% pa)
8 Cross-currency basis swaps A basis for making cost of finance comparisons across currencies SWPM can also value cross-currency basis swaps (float-float swaps across two currencies). Use PRODUCTS pull-down menu to chose this swap. Quarterly- reset quarterly-pay 5-year x-crncy basis swap across USD-EUR has zero premium for deal to receive USD LIBOR and pay EUR LIBOR minus a 23 b spread. Market conditions are USD LIBOR at bp and EUR LIBOR at 22.6bp pa. Swap Manager intro The value of fair value
9 This is useful info...and not only for swap counterparties Usefulness: If I m a treasurer with a borrowing need, this analysis tells me what interest rate in someone else s currency is a good deal in my currency Claim: Borrowing five years floating at semiannual USD LIBOR is the same as cost of financing as borrowing five years floating at quarterly EUR LIBOR minus 23 bp Evidence for claim: One can be swapped into the other, with zero premium paid/received...a zero NPV trade Swap Manager intro The value of fair value
10 Swap manager is flexible to deal with various deals. Here is an annual pay swap. Use pull-downs to change reset and pay freq to "Annual". At annual reset and pay frequency, the -23 bp spread results in an "off-market" premium swap, with a positive market value of bp, i.e. $5954 per $10 million of notional principal. Swap Manager intro The value of fair value
11 The fair-value annual swap Ask SWPM to calculate EUR LIBOR spread for zero premium. The at-market swap has a spread of bp pa. Comparing to the quarterly EUR LIBOR case, increasing the rate paid to the EUR LIBOR leg a little reduces the PV of the deal to the USD LIBOR paying leg, so it is no longer positive. Swap Manager intro The value of fair value
12 Behind the scenes... Curves, cash flows, and valuation scenarios are on the SWPM tabs Swap Manager intro The value of fair value
13 BB help docs provide pricing and key-punch details... green help key explains a lot of the finance I am skipping over Swap Manager intro The value of fair value
14 What s it got to do with corp fin? If I m a treasurer with a borrowing need, this analysis can tell us what interest rate in someone else s currency is a good deal in my currency. hhtype XCF, for pictorial cross-currency basis swap premium analysis. Choose single currency analysis from Views pulldown, EUR (vs USD LIBOR) and 5 year term. Note results show spreads for a zero premium at various dates (including Today). Note this is bid view, i.e., the leg receives USD LIBOR. Benchmarking borrowing costs Application to fixed rate loans Recall -23 bp is same spread we say with quarterly reset in earlier detailed analysis---numbers here are result of same analysis.
15 USD vs EUR LIBOR floating rates A lower EUR rate is PV-equivalent to a higher USD rate. Di erential level at bp for maturities of 2+ years; was 45-ish bp last year. Same analysis (XCF <Go>), but now choose more maturities and mid-point quotes. We are moving toward a full comparison of financing opportunities in dollars and euros, from the point of view of a US based treasurer. The x-crncy basis swap market tells us what spread (EUR LIBOR differential vs USD LIBOR) would make for an at-market swap today---thereby telling us what would be an atmarket deal comparison on floating rate loans. Benchmarking borrowing costs Application to fixed rate loans Today's market, for various maturities Today's market is the rightmost set of bars, with history to the left.
16 Can view info in various formats to answer various questions; e.g., a yield curve view helps treasurer evaluate floating rate loan comparisons of various terms Benchmarking borrowing costs Application to fixed rate loans
17 Analyze x-crncy fixed rates too... by snapping on same-currency fixed-for-floating swap to each leg... remember, swap manager prices those too Here is the USD side of the analysis. We have seen both these SWPM screens before. On left is a USD fixed-for-floating swap. On right is a USD-EUR LIBOR floating-floating swap (cross-currency basis swap). Benchmarking borrowing costs Application to fixed rate loans 1.78% fixed is PV-equivalent to USD LIBOR floating (i.e., with timing details as shown). And USD LIBOR floating is PV-equivalent to EUR LIBOR - 23 bp. So if treasurer with a 1.77% fixed USD borrowing opportunity can beat EUR LIBOR - 23 bp, it is a good deal (in PV terms; appropriate-for-the-use is a different question). To compare to a fixed rate EUR loan, snap a EUR fixed-for-floating swap onto this analysis.
18 Not a fantasy... research has established that searching for good funding opportunities this way is profitable for AA-rated credits... Journal of Financial Economics 86 (2007), Benchmarking borrowing costs Application to fixed rate loans
19 Teaching tactics This sort of thing works best hands-on but pound the points, as students will want to lose the forest for the trees My favorite routine: See one, do one, teach one Force more than is comfortable: Detailed, graphical briefing books; recordings; class lab exercises Better for depth than breadth; takes a lot of time
20 The end. Thank you for your time and e ort! That s all I know about Bloomberg and most of what I know about fixed income. Questions?
Instructions and Guide for Pricing and Valuation of Interest Rate Swap Lab
Instructions and Guide for Pricing and Valuation of Interest Rate Swap Lab FINC413 Lab c 2014 Paul Laux and Huiming Zhang 1 Introduction 1.1 Overview In this lab, you will learn basic idea of meanings
More informationINTEREST RATE SWAPS September 1999
INTEREST RATE SWAPS September 1999 INTEREST RATE SWAPS Definition: Transfer of interest rate streams without transferring underlying debt. 2 FIXED FOR FLOATING SWAP Some Definitions Notational Principal:
More informationTenor Adjustments for a Basis Swap
Tenor Adjustments for a Basis Swap by Chandrakant Maheshwari Praveen Maheshwari Table of Contents 1. Introduction 3 2. Tenor Adjustment Methodology for a Basis Swap 3 3. Why this Tenor Spread so important
More informationFIXED-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 informationFixed-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 informationUnderstanding Cross Currency Swaps. A Guide for Microfinance Practitioners
Understanding Cross Currency Swaps A Guide for Microfinance Practitioners Cross Currency Swaps Use: A Currency Swap is the best way to fully hedge a loan transaction as the terms can be structured to exactly
More informationAnalytical Research Series
EUROPEAN FIXED INCOME RESEARCH Analytical Research Series INTRODUCTION TO ASSET SWAPS Dominic O Kane January 2000 Lehman Brothers International (Europe) Pub Code 403 Summary An asset swap is a synthetic
More informationINTEREST RATE SWAP (IRS)
INTEREST RATE SWAP (IRS) 1. Interest Rate Swap (IRS)... 4 1.1 Terminology... 4 1.2 Application... 11 1.3 EONIA Swap... 19 1.4 Pricing and Mark to Market Revaluation of IRS... 22 2. Cross Currency Swap...
More informationEquity-index-linked swaps
Equity-index-linked swaps Equivalent to portfolios of forward contracts calling for the exchange of cash flows based on two different investment rates: a variable debt rate (e.g. 3-month LIBOR) and the
More informationFNCE 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 informationAdvanced forms of currency swaps
Advanced forms of currency swaps Basis swaps Basis swaps involve swapping one floating index rate for another. Banks may need to use basis swaps to arrange a currency swap for the customers. Example A
More informationYIELD CURVE GENERATION
1 YIELD CURVE GENERATION Dr Philip Symes Agenda 2 I. INTRODUCTION II. YIELD CURVES III. TYPES OF YIELD CURVES IV. USES OF YIELD CURVES V. YIELD TO MATURITY VI. BOND PRICING & VALUATION Introduction 3 A
More informationSwaps. You can drag and drop the push pin on the top right corner to Excel to download data.
Swaps This session is designed to demonstrate how you can monitor current market rates, view and set defaults for swap curves and volatility, and value an interest rate swap and other swaps. Please go
More informationWhat are Swaps? Spring 2014. Stephen Sapp
What are Swaps? Spring 2014 Stephen Sapp Basic Idea of Swaps I have signed up for the Wine of the Month Club and you have signed up for the Beer of the Month Club. As winter approaches, I would like to
More informationFloating rate Payments 6m Libor. Fixed rate payments 1 300000 337500-37500 2 300000 337500-37500 3 300000 337500-37500 4 300000 325000-25000
Introduction: Interest rate swaps are used to hedge interest rate risks as well as to take on interest rate risks. If a treasurer is of the view that interest rates will be falling in the future, he may
More informationIntroduction 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 informationHow To Understand A Rates Transaction
International Swaps and Derivatives Association, Inc. Disclosure Annex for Interest Rate Transactions This Annex supplements and should be read in conjunction with the General Disclosure Statement. NOTHING
More informationBond Valuation. Capital Budgeting and Corporate Objectives
Bond Valuation Capital Budgeting and Corporate Objectives Professor Ron Kaniel Simon School of Business University of Rochester 1 Bond Valuation An Overview Introduction to bonds and bond markets» What
More informationFixed 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 informationInterest Rate Swaps. Key Concepts and Buzzwords. Readings Tuckman, Chapter 18. Swaps Swap Spreads Credit Risk of Swaps Uses of Swaps
Interest Rate Swaps Key Concepts and Buzzwords Swaps Swap Spreads Credit Risk of Swaps Uses of Swaps Readings Tuckman, Chapter 18. Counterparty, Notional amount, Plain vanilla swap, Swap rate Interest
More informationCurrency and Interest Rate Swaps
MWF 3:15-4:30 Gates B01 Final Exam MS&E 247S Fri Aug 15 2008 12:15PM-3:15PM Gates B01 Or Saturday Aug 16 2008 12:15PM-3:15PM Gates B01 Remote SCPD participants will also take the exam on Friday, 8/15 Please
More informationBond 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 informationWith the derivative markets having changed dramatically since the 2008 financial crisis,
Avoiding Collateral Surprises: Managing Multi-Currency CSAs Anna Barbashova, Numerix - 24 Jan 2013 This article explores multi-currency credit support annexes (CSAs) in the derivatives area and their potential
More informationLearning Curve An introduction to the use of the Bloomberg system in swaps analysis Received: 1st July, 2002
Learning Curve An introduction to the use of the Bloomberg system in swaps analysis Received: 1st July, 2002 Aaron Nematnejad works in the fixed income analytics team at Bloomberg L.P. in London. He graduated
More informationMONEY 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 informationEris Interest Rate Swap Futures: Flex Contract Specifications
Eris Interest Rate Swap Futures: Flex Contract Specifications Trading Hours Contract Structure Contract Size Trading Conventions Swap Futures Leg Conventions Effective Date Cash Flow Alignment Date ( CFAD
More informationLecture 12. Options Strategies
Lecture 12. Options Strategies Introduction to Options Strategies Options, Futures, Derivatives 10/15/07 back to start 1 Solutions Problem 6:23: Assume that a bank can borrow or lend money at the same
More informationSwapEx Contract Specifications. USD LIBOR Interest Rate Swaps: Fixedto-Floating
SwapEx Contract Specifications USD LIBOR Interest Rate Swaps: Fixedto-Floating There are two types of USD LIBOR Interest Rate Swaps; Fixed-to-Floating contracts available for trading on SwapEx: Fixed Rate
More informationFINANCIAL 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 informationInstructions and Guide for World Bonds and Yields Lab
Instructions and Guide for World Bonds and Yields Lab FINC413 Lab c 2014 Paul Laux and Huiming Zhang 1 Introduction 1.1 Overview In this lab, you will use Bloomberg to explore some important issues about
More informationInternational Money and Banking: 12. The Term Structure of Interest Rates
International Money and Banking: 12. The Term Structure of Interest Rates Karl Whelan School of Economics, UCD Spring 2015 Karl Whelan (UCD) Term Structure of Interest Rates Spring 2015 1 / 35 Beyond Interbank
More informationCHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
CHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Describe the difference between a swap broker and a swap dealer. Answer:
More informationThe properties of interest rate swaps An investigation of the price setting of illiquid interest rates swaps and the perfect hedging portfolios.
The properties of interest rate swaps An investigation of the price setting of illiquid interest rates swaps and the perfect hedging portfolios. Max Lindquist 12/23/211 Abstract The main purpose of this
More informationFIN 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 informationHow To Sell A Callable Bond
1.1 Callable bonds A callable bond is a fixed rate bond where the issuer has the right but not the obligation to repay the face value of the security at a pre-agreed value prior to the final original maturity
More informationTrading 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 informationIFRS Practice Issues for Banks:
IFRS Practice Issues for Banks: Fair value measurement of derivatives the basics September 2012 kpmg.com/ifrs Contents Highlighting the path to fair value for derivatives 1 1. Introduction 2 2. How are
More informationIntroduction to Eris Exchange Interest Rate Swap Futures
Introduction to Eris Exchange Interest Rate Swap Futures Overview Eris Exchange interest rate swap futures ( Eris contracts ) have been designed to replicate the net cash flows associated with plain-vanilla,
More informationBuy = Pay Fixed, Receive Float -or- Pay Float +/- Spread, Receive Float Sell = Receive Fixed, Pay Float -or- Receive Float +/- Spread, Pay Float
VIA Electronic Submission Office of the Secretariat Commodity Futures Trading Commission Three Lafayette Centre 1155 21 st Street, N.W. Washington, DC 20581 Re: Javelin SEF, LLC To Whom It May Concern,
More informationCHAPTER 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 information19. Interest Rate Swaps
19. Interest Rate Swaps Reading: Stigum 19 on Swaps. See also Hull who builds from the idea (mentioned in Stigum) that swaps are like a portfolio of forward contracts. Daily Financial Times includes bid-ask
More informationCHAPTER 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 informationIn terms of expected returns, MSFT should invest in the U.K.
Rauli Susmel Dept. of Finance Univ. of Houston FINA 4360 International Financial Management 12/4/02 Chapter 21 Short-term Investing MNCs have many choices for investing Home return(usd) = deposit interest
More informationCoupon 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 informationLOS 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 information2. Determine the appropriate discount rate based on the risk of the security
Fixed Income Instruments III Intro to the Valuation of Debt Securities LOS 64.a Explain the steps in the bond valuation process 1. Estimate the cash flows coupons and return of principal 2. Determine the
More informationHow To Understand Credit Default Swaps
The CDS market: A primer Including computational remarks on Default Probabilities online Roland Beck, Risk Analysis Group Folie 2 The CDS market: A primer Credit Default Swaps Short Introduction CDS are
More information1.2 Structured notes
1.2 Structured notes Structured notes are financial products that appear to be fixed income instruments, but contain embedded options and do not necessarily reflect the risk of the issuing credit. Used
More informationClass Note on Valuing Swaps
Corporate Finance Professor Gordon Bodnar Class Note on Valuing Swaps A swap is a financial instrument that exchanges one set of cash flows for another set of cash flows of equal expected value. Swaps
More informationDCF and WACC calculation: Theory meets practice
www.pwc.com DCF and WACC calculation: Theory meets practice Table of contents Section 1. Fair value and company valuation page 3 Section 2. The DCF model: Basic assumptions and the expected cash flows
More informationTreasury Floating Rate Notes
Global Banking and Markets Treasury Floating Rate Notes DATE: April 2012 Recommendation summary The USD 7trn money market should support significant FRN issuance from the Treasury. This would diversify
More informationTopics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk
Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow
More informationWe first solve for the present value of the cost per two barrels: (1.065) 2 = 41.033 (1.07) 3 = 55.341. x = 20.9519
Chapter 8 Swaps Question 8.1. We first solve for the present value of the cost per two barrels: $22 1.06 + $23 (1.065) 2 = 41.033. We then obtain the swap price per barrel by solving: which was to be shown.
More informationThe Term Structure of Interest Rates CHAPTER 13
The Term Structure of Interest Rates CHAPTER 13 Chapter Summary Objective: To explore the pattern of interest rates for different-term assets. The term structure under certainty Forward rates Theories
More informationApplication of Interest Rate Swaps in Indian Insurance Industry Amruth Krishnan Rohit Ajgaonkar Guide: G.LN.Sarma
Institute of Actuaries of India Application of Interest Rate Swaps in Indian Insurance Industry Amruth Krishnan Rohit Ajgaonkar Guide: G.LN.Sarma 21 st IFS Seminar Indian Actuarial Profession Serving the
More informationONIA Swap Index. The derivatives market reference rate for the Euro
ONIA Swap Index The derivatives market reference rate for the Euro Contents Introduction 2 What is an EONIA Swap? 3-4 EONIA Swap Index The new benchmark 5-8 EONIA 9-10 Basis Swaps 10 IRS vs. EONIA Swap
More informationChapter 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 informationIntroduction to swaps
Introduction to swaps Steven C. Mann M.J. Neeley School of Business Texas Christian University incorporating ideas from Teaching interest rate and currency swaps" by Keith C. Brown (Texas-Austin) and Donald
More informationChapter 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 informationYou just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?
1 You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each
More informationFIN 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 informationCURRENT STANDARDS ON FIXED INCOME
CURRENT STANDARDS ON FIXED INCOME PRICING FIXED INCOME SECURITIES AGAINST AN INTEREST SWAP CURVE December 2012 CNO Association régie par la loi du 1 er juillet 1901 8 rue du Mail 75002 Paris http://www.cnofrance.org
More informationHedging Interest-Rate Risk: A Primer in Instruments. & Accounting. September 29, 2015. Presented by: Ruth Hardie
Hedging Interest-Rate Risk: A Primer in Instruments September 29, 2015 & Accounting Presented by: Ruth Hardie Hedge Trackers, LLC Integrated Derivative Management Interest Rate, Foreign Currency and Commodities
More informationUnderstanding interest
& California Debt and Investment Advisory Commission Understanding interest rate swap math pricing CDIAC #06-11 January 2007 & California Debt and Investment Advisory Commission Understanding interest
More informationCHAPTER 10. CURRENCY SWAPS
CHAPTER 10. CURRENCY SWAPS The advent of swaps, as much as anything else, helped transform the world s segmented capital markets into a single, truly integrated, international capital market. John F. Marshall
More informationAnalysis 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 informationCHAPTER 6. Different Types of Swaps 1
CHAPTER 6 Different Types of Swaps 1 In the previous chapter, we introduced two simple kinds of generic swaps: interest rate and currency swaps. These are usually known as plain vanilla deals because the
More informationCHAPTER 5. Interest Rates. Chapter Synopsis
CHAPTER 5 Interest Rates Chapter Synopsis 5.1 Interest Rate Quotes and Adjustments Interest rates can compound more than once per year, such as monthly or semiannually. An annual percentage rate (APR)
More informationChapter 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 informationBond 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 informationVALUATION 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 informationMarkit Credit Default Swap Calculator User Guide
Markit Credit Default Swap Calculator User Guide November 2010 Contents Introduction... 3 Instruments Covered... 3 Functionality Overview... 3 CDS Reference Entity and Contract Terms... 3 Credit Curve...
More informationFixed 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 informationHow To Invest In Stocks And Bonds
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 informationDACT autumn diner workshop. Risk management, valuation and accounting
DACT autumn diner workshop Risk management, valuation and accounting Agenda 1. Risk management - mitigate risk Cost of hedging Risk mitigants Risk management policy 2. Valuation & accounting - mitigate
More informationInterest Rate Swap. Product Disclosure Statement
Interest Rate Swap Product Disclosure Statement A Product Disclosure Statement is an informative document. The purpose of a Product Disclosure Statement is to provide you with enough information to allow
More informationANALYSIS 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 informationCHAPTER 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 informationBond Valuation. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Bond Valuation: An Overview
Bond Valuation FINANCE 350 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University 1 Bond Valuation: An Overview Bond Markets What are they? How big? How important? Valuation
More informationMBA Finance Part-Time Present Value
MBA Finance Part-Time Present Value Professor Hugues Pirotte Spéder Solvay Business School Université Libre de Bruxelles Fall 2002 1 1 Present Value Objectives for this session : 1. Introduce present value
More informationEurodollar Futures, and Forwards
5 Eurodollar Futures, and Forwards In this chapter we will learn about Eurodollar Deposits Eurodollar Futures Contracts, Hedging strategies using ED Futures, Forward Rate Agreements, Pricing FRAs. Hedging
More informationEstimating Risk free Rates. Aswath Damodaran. Stern School of Business. 44 West Fourth Street. New York, NY 10012. Adamodar@stern.nyu.
Estimating Risk free Rates Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 Adamodar@stern.nyu.edu Estimating Risk free Rates Models of risk and return in finance start
More informationCHAPTER 8 INTEREST RATES AND BOND VALUATION
CHAPTER 8 INTEREST RATES AND BOND VALUATION Answers to Concept Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury securities have substantial
More informationThe Short Dated Interest Rate Market Trading JIBAR Futures
JOHANNESBURG STOCK EXCHANGE Interest Rates The Short Dated Interest Rate Market Trading JIBAR Futures JIBAR Futures are Short Term Interest Rate (STIR) Futures based on the 3-month JIBAR (Johannesburg
More informationLIFE INSURANCE AND WEALTH MANAGEMENT PRACTICE COMMITTEE AND GENERAL INSURANCE PRACTICE COMMITTEE
LIFE INSURANCE AND WEALTH MANAGEMENT PRACTICE COMMITTEE AND GENERAL INSURANCE PRACTICE COMMITTEE Information Note: Discount Rates for APRA Capital Standards Contents 1. Status of Information Note 3 2.
More informationChapter 4 Valuing Bonds
Chapter 4 Valuing Bonds MULTIPLE CHOICE 1. A 15 year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity of this bond must be a. less than 8%. b. equal to 8%. c. greater than
More informationHow To Understand The Swap Market
CHAPTER 13 CURRENCY AND INTEREST RATE SWAPS Chapter Overview This chapter is about currency and interest rate swaps. It begins by describing the origins of the swap market and the role played by capital
More informationDefining Treasury Success. Establishing and Automating Treasury Metrics
Defining Treasury Success Establishing and Automating Treasury Metrics B How do we know when treasury is operating effectively? That is the key question many of our corporate clients are asking. They are
More informationASSET LIABILITY MANAGEMENT Significance and Basic Methods. Dr Philip Symes. Philip Symes, 2006
1 ASSET LIABILITY MANAGEMENT Significance and Basic Methods Dr Philip Symes Introduction 2 Asset liability management (ALM) is the management of financial assets by a company to make returns. ALM is necessary
More informationAlliance 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 informationChapter 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 informationIntroduction to Derivative Instruments Part 1 Link n Learn
Introduction to Derivative Instruments Part 1 Link n Learn June 2014 Webinar Participants Elaine Canty Manager Financial Advisory Deloitte & Touche Ireland ecanty@deloitte.ie +353 1 417 2991 Christopher
More informationSingle Name Credit Derivatives:
Single ame Credit Derivatives: Products & Valuation Stephen M Schaefer London Business School Credit Risk Elective Summer 2012 Objectives To understand What single-name credit derivatives are How single
More informationHot Topics in Financial Markets Lecture 1: The Libor Scandal
Hot Topics in Financial Markets Lecture 1: The Libor Scandal Spot and Forward Interest Rates Libor Libor-Dependent Financial Instruments The Scandal 2 Spot Interest Rates Bond Market The yield on a bond
More informationAnswers 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 informationInternational Master Economics and Finance
International Master Economics and Finance Mario Bellia bellia@unive.it Pricing Derivatives using Bloomberg Professional Service 03/2013 IRS Summary FRA Plain vanilla swap Amortizing swap Cap, Floor, Digital
More informationInterest 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 informationEcon 330 Exam 1 Name ID Section Number
Econ 330 Exam 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If during the past decade the average rate of monetary growth
More informationChapter 6 Valuing Bonds. (1) coupon payment - interest payment (coupon rate * principal) - usually paid every 6 months.
Chapter 6 Valuing Bonds Bond Valuation - value the cash flows (1) coupon payment - interest payment (coupon rate * principal) - usually paid every 6 months. (2) maturity value = principal or par value
More informationThe determinants of the swap spread Moorad Choudhry * September 2006
The determinants of the swap spread Moorad Choudhry * September 6 YieldCurve.com 6 Page 1 Interest-rate swaps are an important ALM and risk management tool in banking markets. The rate payable on a swap
More information