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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 ([email protected]) – 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 ([email protected]) – 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 α ) and the face value F as follows: total annual coupon payment = αF, 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 = αF m C. Weng ([email protected]) – p. 3/ ? ? Notation and terminology (cont’d) • coupon period : period between two consecutive coupons; equals to 1 /m year....
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This note was uploaded on 01/21/2011 for the course ACTSC 231 taught by Professor Chisholm during the Fall '09 term at Waterloo.
 Fall '09
 Chisholm

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