Notes_10_finance_5108_08 - Finance 5108 Notes 10 Learning...

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Finance 5108 Notes 10 Learning Objectives 1. Understand the particulars of the Bond markets and how they trade 2. Know the aspects of the T-bond futures and T-note futures contract contracts, how they trade and what makes them different 3. Understand the Eurodollar futures markets and other short term futures contracts 4. Be able to apply duration to the hedging of futures contracts 5. Know what duration matching and immunization strategies used in hedging with the future markets. Day count conventions 1. T-Bonds Actual days 365 day year When Treasury note or bonds are purchased you pay the principal amount and the accrued interest from the last coupon date. For instance if you buy a 10 year T-note with a 3.5% coupon with $100,000 face value today and the last coupon payment was February 15 th at a quoted price of 100 8/32. You would have an invoice for $100,250 and accrued interest of $548.08 (57/182 (.035/2*100,000)). This is assuming that the settlement is 03/27/08. The 57 is the actual number of days from February 15 th to March 27 th and 182 is the actual calendar days from February 15 th to August 15 th . 2. Corporate and Municipal bonds When corporate or municipal bonds are quoted they are done on the basis of a 360 day year so each 6 months would have 180 days and each month has 30 days. For instance if the quoted price for a corporate bond is 101 ¼, the last coupon was February 1, a coupon rate of 4%, and a face value of $100,000 and the settlement date was March 27 th , then the invoice would be for $101,250 plus the accrued interest of $633.33 (30+27)/180 (.04/2*100,000). 3. Money market instruments 360 day year sold and quoted at the annual discount to the par value For instance if you were to purchase a $100,000 face value 91 day T-bill, which is quoted a discount yield of 2.25% the invoice price would be (100,000 – 100,000 (.0225 X 91/360) = $99,431.25.
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Notes_10_finance_5108_08 - Finance 5108 Notes 10 Learning...

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