Teaching Notes #7
Mortgage Backed Securities
Pietro Veronesi
University of Chicago - GSB
Business 35130 Fall 2002
This Version: August 1, 2002
Topics:
1. Mortgage Backed Securities
1.1 Securitization
1.2 Mortgages and Prepayment Option
1.3 Prepayment in P
Outline
Fixed Income Markets and Management
Basics of Interest Rate Risk Management
The Variation in Interest Rates
Duration
Interest Rate Risk Management
COMM 474
Asset-liability Management
2
Zero Coupon Bond Yields and the Level of Interest Rates:
1965
Outline
Fixed Income Markets and Management
A Two-step Binoimal Tree
Multi-step Binomial Trees
Risk Neutral Pricing
Matching the Term Structure
COMM 474
Multi-step Trees
Pricing and Risk Assessment: The Spot Rate Duration
2
A Two-step Binoimal Tree
Treasu
Outline
Fixed Income Markets and Management
Introduction
Introduction
The Government Debt Markets
The Money Market
COMM 474
The Repo Market
2
The Complexity of Fixed Income Markets
The Size of Fixed Income Markets: December 2008
Debt markets have expanded
Outline
Fixed Income Markets and Management
Risk Neutral Trees
Risk Neutral Trees and Derivative Pricing
Using Risk Neutral Trees
Implied Volatilities and the Black, Dermand and Toy Model
COMM 474
Risk Neutral Trees for Futures Prices
2
The Ho-Lee Model
H
Outline
Fixed Income Markets and Management
Interest Rate Derivatives - Futures and
Options
Interest Rate Futures
Options
COMM 474
2
Futures vs. Forward
Some Futures Contracts
Futures contracts are similar to forward contracts:
they are contractual agreem
Outline
Fixed Income Markets and Management
Basic Renements in Interest Rate Risk
Management
Convexity
Slope and Curvature
COMM 474
2
Zero Coupon Bond Prices versus Interest Rates
3
Bond Price Approximation with Duration
4
Second Derivative
Convexity
The
Outline
Fixed Income Markets and Management
Discount Factors
Basics of Fixed Income Securities
Interest Rates
The Term Structure of Interest Rates
COMM 474
Coupon Bonds
Quoting Conventions
Floating Rate Bonds
2
Discount Factors
Discount Factors across Mat
Outline
Fixed Income Markets and Management
One Step Binomial Trees
A One-step Interest Rate Binomial Tree
No Arbitrage on a Binomial Tree
Derivative Pricing as Present Discounted Values of Future Cash Flows
COMM 474
Risk Neutral Pricing
2
Term Structure
Haugen Table - Determining market concensus expected returns and future rates
Pure Expectations (if LP = 0) or Liquidity Premium (if LP > 0)
Bolded cells = inputs
Expected (annualized) return on strips of various maturities
Input->
TODAY
now
in .5 yrs
in
Questions for DBRS14Jan15 Part A [Feb 26]
While the Critchley article contains some of the information we wish to cover, you will
primarily refer to the DBRS Report for 2014, also attached.
1. See page 11 of the Report. The table shows there are 555 rated
COM 474 - Credit Valuation Example
Updated February 2015
You wish to value a 10% coupon, 1.5-year maturity debenture issued by XYZ Corp.
The entire debenture issue has $200 million face value. The firm's "typical"
income statement appears (all figures in
Questions for Selloff13Feb15
1.
What is the main point of the article, as summarized by the first three
paragraphs?
DEFINITION OF 'SELL-OFF'
The rapid selling of securities, such as stocks, bonds and commodities. The
increase in supply leads to a decline
Team 5 Presentation: Mitigate
BOC Says Low Rates Will Mitigate Oil
Shock
COMM 474
Fixed Income Markets
Team members: Raveena Rai, Can Poge, Jennifer Liu, Rae Liu, Martin
Luptak, Lucas Goh
Mitigate Article: Question 1
BoC cut Canada Overnight rate by 25 bp
S
DA
A
N5
A
F LOZ1
O:PO
KTICLE
N
A 6 AR
B E AM
T
C 0MAR1
E
AT
R
T
CU
Surprise rate cut on 21st
January
Poloz stated the bank is
able to cut the rates further
if needed
Early march Poloz
backtracked from
earlier statement,
stating a wait-and-see
attitude
1. David Rosenberg of Gluskin Shef says 2014 was a great year for bonds. Find what the TMX or a similar US bond index return was (in domestc dollars
no FX efect). What does Rosenberg expect for this year? What is his recommendaton?
During the second half
Fixed Income Markets and Management
Risk Neutral Trees and Derivative Pricing
COMM 474
Outline
1
Risk Neutral Trees
2
Using Risk Neutral Trees
3
Implied Volatilities and the Black, Dermand and Toy Model
4
Risk Neutral Trees for Futures Prices
COMM 474
Ris
Merrill Lynch Attribution Example - Input Data
t
2
3
5
9
10
20
29
30
- - - - - - - - - - - t = 0 data - - - - - - - - - - - credit spreads
g^0_t
Bond A
Bond B
Bond C
0.0180
0.0200
0.0150
0.0250
0.0310
0.0330
0.0300
0.0380
0.0410
0.0420
0.0000
One year per
Teaching Notes #9
Risky Bonds and Credit Derivatives
Pietro Veronesi
Graduate School of Business
University of Chicago
Business 35130 Fall 2002
Topics:
1. Modeling Default Risk
2. The Instantaneous Probability of Default
2.1 The Market Price of Default Ri
Teaching Notes #8
Multivariate Models:
Principal Component Analysis,
Hull and White Model,
Heath-Jarrow-Morton Model
Pietro Veronesi
University of Chicago - GSB
Business 35130 Fall 2002
This Version: August 1, 2002
Topics:
1. Factor Analysis of the Term S
Teaching Notes #4
Computing Prices of Fixed Income
Securities in Practice:
Monte Carlo Simulations and Trees
Pietro Veronesi
University of Chicago - GSB
Business 35130 Fall 2002
This Version: August 1, 2002
Topics:
1. Solving for Security Prices
2. Monte-
Teaching Notes #2
A Primer in Continuous Time Finance
Pietro Veronesi
University of Chicago - GSB
Business 35130 Fall 2002
This Version: August 1, 2002
Topics:
1.
Stochastic Calculus
1.1
1.2
1.3
1.4
2.
Discrete-Time Random Walk
Continuous-Time Brownian Mo
Teaching Notes #6
Interest Rate Derivatives: The Market
Model
1
Pietro Veronesi
University of Chicago - GSB
Business 35130 Fall 2002
This Version: August 1, 2002
Topics:
1. Standard Derivatives: Market Practice
1.1 Preliminaries: Futures and Forwards
1.2
Teaching Notes #3
One-Factor Models of Interest Rates
Pietro Veronesi
University of Chicago - GSB
Business 35130 Fall 2002
This Version: August 1, 2002
Topics:
1.
The General Set Up
1.1
No Arbitrage in General One-Factor Models
2.
Risk Neutral and Risk Na
Teaching Notes #1
Fixed Income Securities
Pietro Veronesi
University of Chicago - GSB
Business 35130 Fall 2002
This version: July 31, 2002
Topics:
1. Fixed Income Markets
1.1 Classication of Debt Securities
1.2 Simple Fixed-Income Contracts
2. Review of B