1- 1
Fixed Income Securities
Lecture Set 2A
Yield Spreads
Professor Pradeep Yadav
1- 2
Yield Spreads
w Yield spread (measured in basis points) is the difference
between any two bond issues and is computed as follows:
Yield spread = Yield on Bond 1 Yield o
Ch. 5 Problems
2. The yield spread between two corporate bond issues reflects more than just differences
in their credit risk. What other factors would the spread reflect?
In addition to the perceived riskiness of the issuer, other factors that affect the
Ch. 4 Problems
1
2. Calculate the requested measures in parts (a) through (f) for bonds A and B (assume that each bond
pays interest semiannually):
Bond A Bond B
8%
9%
8%
8%
2
5
$100.00 $100.00
$100.00 $104.055
Coupon
Yield to maturity
Maturity (years)
Pa
Livingston Ch. 2 terms
classical theory of interest rates
According to the classical theory, the money supply does not affect interest rates. Two socalled real factors, business investment and savings by individuals, are judged to be the
determinants of
Ch. 3 Problems
Nick Pierson
1
5. Answer the below questions.
(a) Show the cash flows for the following four bonds, each of which has a par value of $1,000 and pays interest
semiannually.
Bond
W
X
Y
Z
Coupon Rate (%)
7
8
9
0
Number of Years to Maturity
5
7
Yield Spread
o The difference between the yields of any 2 bonds
o Normally quoted in terms of basis points
o Reflects the difference in the risks associated with the 2 bonds
o Can also think of it in terms of sectors of the bond market
The Term structure
Chap 3: Measuring Yield
internal rate of return, Yield to maturity , conventional yield measures , dollar return,
investment horizon, Call risk, reinvestment risk. Yield To Sinker, Yield To Call, Cash Flow Yield
Internal rate of return
The yield on any i
Ch. 4: Bond Price Volatility
Nick Pierson
1
Review of the price-yield relationship for Option-free bonds
When the price-yield relationship for any option-free bond is graphed, it exhibits the shape
shown in Exhibit 4-2 (In written notes).
Notice that as
2
Determinants of
Interest Rates
Overview
Many varieties of debt instruments exist in the market. Each type of instrument has a slightly different interest rate because of the particular characteristics of the debt instrument involved. Individual interest
Ch. 2 Livingston Problems & Answers
Fixed Income
Nick Pierson
3) Assume that the real rate of interest is 3% and that the inflation rate is 10% with complete
certainty and no taxes. Determine the nominal interest rate.
Nominal interest rate = (1.03)(1.10)
Factors that impact option value
Term structure of interest rates
The options embedded in the bond
Expected volatility of interest rates
Static Spread
Aka zero-volatility spread
A measure of the spread that the investor would realize over the entire
1- 1
Fixed Income Securities
Lecture Set 3B
Duration: Parallel Changes in the Yield Curve
Professor Pradeep Yadav
1- 2
Prices and Interest Rates
The price of a coupon bond with T periods to maturity is given by:
T
C(t)
P 0, T =
t
(1+
r
00t
)
t=1
Suppose
1- 1
Fixed Income Securities
Lecture Set 3A
Risk of Changes in Spot Rates
The Case of Zero-Coupon Bonds
Professor Pradeep Yadav
1- 2
What is the Risk in a Treasury Bond?
w If it is held to maturity, all coupon cash flows are
known and fixed, and the par r
1- 1
Fixed Income Securities
Lecture Set 1C
Bond Spot Rates and Yields
Professor Pradeep Yadav
1- 2
Pricing a Bond
v Determining the price of any financial instrument requires
an estimate of
1)
2)
3)
the expected cash flows
the appropriate discount rates
1- 1
Fixed Income Securities
Lecture Set 1B
Pricing of Bonds
Professor Pradeep Yadav
1- 2
Review of Time Value
v Future Value
The future value (Pn) of any sum of money invested today is:
Pn = P0(1+r)n
n = number of periods
Pn = future value n periods from
1- 1
Fixed Income Securities
Lecture Set 2B
Spot Rates and Forward Rates
Professor Pradeep Yadav
What Interest Rate?
1- 2
w The interest rate charged on a loan depends on three
dates
Date of commitment of loan t0
Date of disbursement of loan t1
Date of
1- 1
Fixed Income Securities
Lecture Set 1
Overview of Fixed Income Securities
Professor Pradeep Yadav
1- 2
Fixed Income Securities
w A fixed income security (typically a bond)
is a financial claim by which
The issuer (or the borrower) is committed.
to p
1- 1
Fixed Income Securities
Lecture Set 2C
The Yield Curve and its Estimation
Professor Pradeep Yadav
1- 2
Prices, Discount Factors and Spot Rates
The schedule of bond prices potentially enables the
calculation of the schedule of discount factors, and th
FIN 4713 Fixed Income Date: May 5
D2L- Plan posted every day
Assignments
Final exam 4:30 Thursday
See pool below
^
Your cell phone will not be used
during class in any way. This
includes getting up to leave the room
to answer your phone. PLEASE DO
NOT LEA
Clearinghouses
Associated with every futures exchange
Guarantees that the two parties to the transaction will perform
When an investor takes a position in the futures market, the clearinghouse takes
the opposite position and agrees to satisfy the terms
Chapter 2
Determinants of Interest Rates
Solutions to Questions/Problems
1.
In the classical theory, the supply of funds equals savings and the demand for
funds is capital investment. The loanable funds theory adds business savings and
increases in the mo