ACTSC 231 ch06-Actsc231

ACTSC 231 ch06-Actsc231 - Chapter 6. Bonds ACTSC231...

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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 semi-annually; 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. non-callable bounds : XBox callable bounds: the issuer has the right to redeem prior to the maturity date, under certain conditions. XBox non-callable 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 semi-annually); 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....
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ACTSC 231 ch06-Actsc231 - Chapter 6. Bonds ACTSC231...

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