The price-yield relationship for any option-free bond is a convex relationship. The convex shape of the priceyield relationship implies that for very small changes in the yield required (like 1 basis point), the percentage price change is roug
What is a convertible bond?
A Convertible Bond is a corporate bond that can be converted - at the option of the bond holder into a predetermined number of shares of common stock of the issuing company.
A convertible bond allow you to exchange the remain
Bonds With Embedded Options
An embedded option gives either the issuer or the bond holder the option but not the obligation to change the expected future cash flows of a bond. The common types of embedded option:
Call Option: A callable bond is a bond i
Municipal (Tax-exempt) Securities and Markets
States, municipalities, and counties raise capital that they need by issuing debt securities. Such securities tend to have a special tax status:
Interest income is exempt from federal, state and where applic
Corporate Debt Securities
Corporations issue debt securities to raise longterm and short-term capital. The corporate issuer promises to pay a specified percentage of par value (the coupon payments) on designated dates and to repay par or principal value
U.S. Treasury and Agency Securities
Securities issued by U.S. Treasury.
To borrow money to finance government spending in excess of tax revenue Budget deficit.
The Treasury Debt market is the most active and liquid securities market in the world
Deconstructing bond yields
What are the factors that cause yields to vary from one bond to another?
Two dimensions to consider
Holding time to maturity constant, bond yields vary as the credit quality changes. In other words, everything else equal, risky
Bond Price - Yield Relationship
Bond prices and market interest rates (yields) move in opposite directions. The Price-Yield relationship for an optionfree bond is a convex; non-liner relationship
800 0 0.01 0.02 0.03 0
Measures of Bond Yields Yield to Maturity
Yield to Maturity: defined as the discount rate That makes the present value of the future cash flows of A bond equal to its price today.
The yield to maturity is measure similar to the IRR. To calculate the YTM,
Valuation of Bonds
Value of any financial security = PV of its expected future cash flows
To value bonds we need to:
Estimate future cash flows:
Size (how much) and Timing (when)
Discount future cash flows at an appropriate r
Fixed-Income Securities and Markets An Overview
What are fixed-income securities? What are the key categories of players in debt markets or fixed income securities markets, and what are their objectives? And finally what are the sources of risk and retur
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FIN-B333 Fixed Income Securities & Markets Syllabus Spring 2010
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Mortgage Pass-Through Security
A Mortgage Pass-Through security, or Mortgage Backed Security (MBS), is created when one or more mortgage holders form a pool ( a portfolio) of mortgages and sell shares or participation certificates in that pool.
Residential Mortgage Loans
A mortgage is a loan secured by the collateral of a particular real estate property, which obliges the borrower (the mortgagor) to make a predetermined series of payments to the lender. A mortgage gives the lender (the mortgage
The spot rate for year 2 can be computed as:
3.00 3.00 3.00 103.00 PV = + + + = $100 (1.02625) (1.0275) 2 (1.02880)3 (1 + z 4 ) 4
Problem 5-13 (Continued)
The spot rate for year 3 can be computed as:
PV = 3.25 3.25 3.25 3.25 3.25 103.25 + +