FIN 611: Overview of Concepts and Problems you should understand for the final exam.
Chapter #1: Introduction to Fixed Income Securities
1. Repo and reverse repo transactions
Chapter #2: Basics of Fix
Quiz Question
Consider a 4-year leveraged inverse floating rate
bond with the following coupon rate: c(t) = 24%2.4*r(t-0.5). This coupon is paid semi-annually,
in arrears. So the dollar coupon at eac
Solution Manual
to accompany the textbook
Fixed Income Securities: Valuation, Risk, and Risk
Management by Pietro Veronesi
Chapters 9 - 13
Preliminary Version
Author: Javier Francisco Madrid
1
Solutio
Chapter 2, Exercise #1
Consider two zero coupon bonds.
Bond #1: 3-yr zero with yield = 10% per
year compounded continuously
Bond #2: 5-yr zero with yield = 5% per
year compounded continuously.
Is
Solution Manual
to accompany the textbook
Fixed Income Securities:
Valuation, Risk, and Risk Management
by Pietro Veronesi
Chapters 2 - 8
Version 1
Date: October, 2009
Author: Anna Cieslak, Javier Fra
Quiz #2 Winter 2012
Question #1: Change in Value of Portfolio using Duration and Convexity
P
W
D
C
w*D
w*C
7yr @ 2%
78.77
40%
6.5071
44.3923
2.60284 17.75692
semi
3.25yr
103.16
30%
0.2717
0.1194
0.081
AMERICAN OPTIONS
An American call option is a contract between
two counterparties in which one party (the option
buyer) has the right, but not the obligation, to
buy a given security at a predetermin
A TWO-STEP BINOIMAL TREE
1
RISK NEUTRAL PRICING
We can obtain the price of any interest rate
security at time 0 by using the risk neutral
approach, that is:
V0 = e-r
p* =
0
[p* V1,u + (1 p*) V1,d]
e
Mortgage Backed Securities
A mortgage pass-through security is a
simple type of MBS created by pooling
mortgage loans and issuing certificates
entitling the investor to receive a pro
rata share in th
Duration Hedging Strategy
Consider a $100 (face value) 10-year
bond that pays a 5% semi-annual coupon
P = $103.58
D = 8.03
C = 73.87
We want to hedge against small parallel
shifts of the term str
Term Structure Models:
Motivation
Assume that you have estimated the
current discount function Z(0,T).
If you were asked to price a 10%, 5-year
T-bond you would compute the price as:
10
P (0) = 5 Z
Example #1
You have the following risk neutral Tree:
Time
0
1
2
3
i
0
1
2
3
j=0
4.00%
7.00%
10.00%
3.00%
5.00%
1
2
2.00%
Risk neutral probability of an up move =
0.5
Example #1
Compute the 1, 2 and 3
INTEREST RATE FUTURES
Futures contracts are similar to forward
contracts in that they are contractual
agreements between two counterparties to
either buy or sell a security at a
predetermined time in
Forward Rates
Suppose a firm want to invest $100 million
for 6 months starting 6 months from now.
It wants to lock in the interest rate that it
would earn on the 6-month loan today.
What rate would
FIN 611
Fixed Income Analysis
Welcome to the course.
Mike Inglis
Office: TRS 1-085
Office Hours: Thursday 12 noon to 1 pm.
E-mail: [email protected]
Overview of Course
Part 1: Cover the basics