Valuation of Option-embedded Bond, Bond Portfolio
Cash Flow Yield
Applies to MBS and ABS.
The discount rate that makes the PV of the expected cash flows
equals to its market price plus accrued interest. (Similar to YTM
Securitization, Pass-through, IO, PO, CMO, MBS, ABS,
The process of transforming a pool of loans/mortgages/account
receivables (which are assets to the security issuer) into
Bond Structure & its Valuation
Face Value (FV)
Life (remaining) (n)
Who are the players?
Bond issuer = Borrower
Bond holder = Lender = investor
Bond Valuation (Price)
(1 + r )
Yield Curve, Term Structure of Interest Rate.
Treasury Yield Curve
Relationship between Yield and Maturity of T-bonds with the
Has reinvestment risk.
often upward sloping. Can also be downward
Credit Analysis, Z-Spread, Option Adjusted Spread,
Binomial Tree Valution
The risk that the issuer will default on its obligations or the
deterioration of the quality of the security issued.
It consists of the followin
Bond Duration, Forward Rate, Term Structure
Price Yield Relationship of an Option-free Bond
Price (Y-axis) & Yield (X-axis) are in inverse relationship.
The curve is non-linear and convex towards origin.
Longer maturity in
Fixed Income Securities
Assignment 2 Group-based Assignment
July 2016 Presentation
This assignment is worth 30% of the final mark for FIN357e Fixed Income Securities.
The cut-off date for this assignment