Chapter 1 Martellini Lecture

Chapter 1 Martellini Lecture - CHAPTER 1 MARTELLINI, et....

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CHAPTER 1 MARTELLINI, et. al. BONDS AND MONEY MARKET INSTRUMENTS BONDS Bond = financial claim by the issuer must pay the principal plus periodic interest payments as promised during a given time period. Standard bond = a fixed coupon bond without any embedded options, delivering its coupons on periodic dates and principal on the maturity date. Non-standard bond = has embedded options. Purpose of bonds: To finance its budget or investment projects at an interest rate that is expected to be lower than the return rate of investment projects at an interest rate that is expected to be lower than the return rate of investment To avoid borrowing from banks at a higher interest rate Less risky than an equity TERMINOLOGY AND CONVENTION Key factors of bonds: Issuer’s name Issuer’s type = sector or industry the issuer belongs to The market in which the bond is issued = the US market, eurodollar market which corresponds to bonds denominated in US dollars and issued in any other country than the US The bond’s currency denomination Method used for the calculation of the bond price/yield = the method depends on the bond category. Type of guarantee = is the type of underlying guarantee for the holder of the security. This can be a mortgage, a car loan, or a government loan. Maturity date Coupon type = can be fixed, floating, or a combination of fixed and floating rates. Coupon rate = expressed as a percentage of the principal amount Coupon frequency = can be annual or semi-annual
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Day count type = the accrued interest between two given dates is calculated using the exact number of calendar days between the two dates divided by the exact number of calendar days. 30/360 means that the number of calendar days between the two dates is computed assuming that each month counts as 30 days. Announcement date = date when the bond is announced and offered to the buying public Interest accrual date = date when interest begins to accrue Settlement date = date on which payment is due in exchange for the bond. It is equal to the trade date plus a number of working days. In the US, the settlement date for T-bonds and T-bills is equal to the trade date plus 1 working day. First coupon date = date of the first interest payment Issuance price = the percentage price paid at issuance Spread at issuance = the spread in basis points to the benchmark T-bond Identifying code = CUSIP numbers or Committee on Uniform Securities Identification Procedures numbers Bond rating = rating agencies, such as S&P and Moody’s, assess the default probability of corporations. A rating is a ranking of a bond’s quality, based on criteria such as the issuer’s reputation, management, balance sheet, and its record in paying interest and principal. See Table 1.1 of textbook for rating scales Par amount or nominal amount or principal amount = the face value of the bond. The nominal amount is used to calculate the coupon bond.
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This note was uploaded on 04/07/2012 for the course ECONOMICS 101 taught by Professor Tillet during the Spring '12 term at Broward College.

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Chapter 1 Martellini Lecture - CHAPTER 1 MARTELLINI, et....

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