FIN 4713 Fixed Income Date: May 5
D2L- Plan posted every day
Assignments
Final exam 4:30 Thursday
See pool below
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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. 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
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
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
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
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. 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
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. 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
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