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topic01_pres - EC372 Bond and Derivatives Markets Bond...

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Unformatted text preview: EC372 Bond and Derivatives Markets Bond Markets & Fixed Interest Securities R. E. Bailey Department of Economics University of Essex University week 16 EC372 Bond and Derivatives Markets Bonds Markets Topic #1 Outline 1 Bonds and bond markets 2 Zero-coupon (ZC) bonds Real ZC bonds 3 Coupon-paying bonds Macaulay Duration Valuation of bonds 4 Risks of bond portfolios 5 Term structure of interest rates Implicit forward rates 6 What determines the term structure? Pure Expectations Hypothesis Liquidity Preference Theory Preferred Habitat Theory Reading: Economics of Financial Markets , chapters 12, 13 EC372 Bond and Derivatives Markets Bonds Markets Topic #1 Outline Bonds and bond markets What’s special about bonds? I A bond’s indenture is a contract that requires the issuer to take specified, deliberate actions I typically to make a definite sequence of payments until a specified terminal date I unlike equity, for which future payoffs (dividends) are discretionary I Bonds are low-risk – the payoffs are contractual I Most bonds can be summarised by just two numbers: 1 Interest rate – the bond’s yield to maturity 2 Time to maturity – time to the date at which the obligation ceases I Understanding bond markets (suggested approach) I Central bank fixes the short-term interest rate (monetary policy) I Bond yields adjust (via price changes) to balance supply and demand for all bonds. EC372 Bond and Derivatives Markets Bonds Markets Topic #1 Outline Bonds and bond markets What’s special about bonds? I A bond’s indenture is a contract that requires the issuer to take specified, deliberate actions I typically to make a definite sequence of payments until a specified terminal date I unlike equity, for which future payoffs (dividends) are discretionary I Bonds are low-risk – the payoffs are contractual I Most bonds can be summarised by just two numbers: 1 Interest rate – the bond’s yield to maturity 2 Time to maturity – time to the date at which the obligation ceases I Understanding bond markets (suggested approach) I Central bank fixes the short-term interest rate (monetary policy) I Bond yields adjust (via price changes) to balance supply and demand for all bonds. EC372 Bond and Derivatives Markets Bonds Markets Topic #1 Outline Bonds and bond markets What’s special about bonds? I A bond’s indenture is a contract that requires the issuer to take specified, deliberate actions I typically to make a definite sequence of payments until a specified terminal date I unlike equity, for which future payoffs (dividends) are discretionary I Bonds are low-risk – the payoffs are contractual I Most bonds can be summarised by just two numbers: 1 Interest rate – the bond’s yield to maturity 2 Time to maturity – time to the date at which the obligation ceases I Understanding bond markets (suggested approach) I Central bank fixes the short-term interest rate (monetary policy) I Bond yields adjust (via price changes) to balance supply and demand for all bonds....
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This note was uploaded on 03/15/2012 for the course EC 372 taught by Professor R.e.bailey during the Spring '12 term at Uni. Essex.

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topic01_pres - EC372 Bond and Derivatives Markets Bond...

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