RMSC2001_Tutorial_5.pdf - RMSC2001 Introduction to Risk Management Tutorial 5 Bond Chen Sihan 1 1.1 Bond Basic Concepts Definition 1.1 A bond is a

# RMSC2001_Tutorial_5.pdf - RMSC2001 Introduction to Risk...

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RMSC2001 - Introduction to Risk Management Tutorial 5: Bond Chen, Sihan Oct 16, 2019 1 Bond 1.1 Basic Concepts Definition 1.1. A bond is a contract or certificate of debt in which the issuer promises to pay the holder a definite sequence of interest payments for a specified period of time, and to repay the loan at a specified terminal date. Maturity date : the terminal date to repay the loan. Term to maturity : the time between the bond issuing date and maturity date. Face value : the amount of money to repay at maturity date, denoted by F , also called the principal . Coupon : the interest that the bond issuer pays to the holder on its face value at regular time intervals until the maturity date, where the rate is called coupon rate , denoted by r , and the amount of each coupon is therefore rF . Bond Price : the amount of money that the bond holder paid at the beginning for the bond, denoted by P . Remark: A bond can be viewed as a cash flow C (0) , . . . , C ( T ), where the positive integer T is the maturity time and 1 , . . . , T are coupon paying times. The values of the cash flow are: C (0) = - P , C ( t ) = rF for t = 1 , . . . , T - 1 and C ( T ) = rF + F . 1
1.2 Types of Bond 1.2.1 Zero-Coupon Bond Definition 1.2. Suppose t i < t j are two time points, the discount factor B ( t i , t j ) is defined as the value of a unit cash flow at time t j discounted to time t i . Definition 1.3. A zero-coupon bond is a bond with coupon rate r = 0. The price of a zero-coupon bond with maturity T and face value F at time t, 0 t T , equals to B ( t, T ) F . Usually the prices are stated as F = \$100.

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