This preview shows pages 1–5. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Chapter 6. Bonds ACTSC231 Mathematics of Finance Department of Statistics and Actuarial Science University of Waterloo Fall 2010 Instructor: Chengguo Weng C. Weng (c2weng@uwaterloo.ca) p. 1/ ? ? Alphabet soup of bonds A bond is a debt instrument; it is a form of loan, issued by major corporations, municipalities, or government. XBox A holder of a corporate bond (for example) has no ownership rights in that corporation (as a shareholder does). XBox An investor purchases the bond. Bond issuer uses the money and pays regular interest" (normally semiannually; called coupons ) and a final lump sum (called redemption ) at a maturity date . XBox The investors may trade bonds in market before the expiration date. coupon bonds (also called pure discount bonds ) V.S. coupon bonds . callable bounds V.S. noncallable bounds : XBox callable bounds: the issuer has the right to redeem prior to the maturity date, under certain conditions. XBox noncallable bounds: redemption date is fixed. Index linked bounds, real return bonds, catastrophe bonds, and etc. C. Weng (c2weng@uwaterloo.ca) p. 2/ ? ? Notation and terminology F denotes face value (or par value ): nominal amount of bond; usually $100 or $1,000; used to calculate coupon amount. coupon : regular interest payments (normally semiannually); expressed through the coupon rate (denoted ) and the face value F as follows: total annual coupon payment = F, i.e., coupon rate = total annual coupon payment face value F . N denotes the term (in years) of the bond=life span of the bond. maturity date=end of life span. m denotes coupon frequency : the number of coupon payments per year; thus, coupon payment = F m C. Weng (c2weng@uwaterloo.ca) p. 3/ ? ? Notation and terminology (contd) coupon period : period between two consecutive coupons; equals to 1 /m year....
View Full
Document
 Fall '09
 Chisholm

Click to edit the document details