Overview of Debt Markets
Fixed Income
Securities
The Size (two-thirds of
the market value)
Market participants
Risk Characteristics
Classification
Lecture 1
US Treasury Securities
Agency Securities
Corporate Securities
2
Continued
The Worlds Bond Marke
PracticeQ
Totheholderofalongposition,itismoredesirabletoownaforwardcontractthana
futurescontractwheninterestratesandfuturespricesare:
A. negativelycorrelated.
B. uncorrelated.
C. positivelycorrelated
Thevalueofaswaptypically:
A. isnonzeroatinitiation.
B.
PracticeQ3
ForaEuropeancalloptionwithtwomonthsuntilexpiration,ifthespotpriceisbelow
theexerciseprice,thecalloptionwillmostlikelyhave:
A. zerotimevalue.
B. positivetimevalue.
C. positiveexercisevalue.
ThevalueofaEuropeanputoptioncanbeeitherdirectlyorinvers
Lecture 6
Ch.10: The short-rate process and the shape
of term structure
Ch.11: The Art of Term Structure: Drift
Ch.10
Arbitrage-free models vs Equilibrium models.
Arbitrage-free models take the initial term structure
as given. They are set up so as to ma
Lecture 8
Ch.6: Measures of Price Sensitivity Based on
Parallel Yield Shifts
Price Sensitivity Measures
(Macaulay and Modified Duration)
To obtain a analytical solution we need additional
assumptions
Flat term structure of spot rates
Parallel shifts
Pro
Lecture 7
Ch.5: One Factor Measures of Price Sensitivity
Measures of Price Sensitivity: Why
i.
To compute how bond prices respond to rate
changes.
ii. Investors who has a view about future
changes in interest rates needs to to know
which instrument will p
Options embedded in Corporate Bonds
The Call Provision
Pricing Callable Bonds with Term-Structure
model
Graphical analysis of Callable Bonds
Lecture 11
Ch.19: Fixed Income Options
11-2
Options valuation
Bermudan vs American options
A call (put) option on
Interest Rate Swap
Swap: agreement to
exchange cash flows
between parties
(counterparties)
Lecture 10
Ch.18: Interest Rate Swap
On Nov 26, 2001, Party A agrees to pay 5.688% on
$100,000,000 to party B every six months for 10 years while
party B agree to p
Forward Contract
A forward contract is an agreement to buy or sell a
security in the future at a price specified at the time of
the agreement.
Forward price refers to that agreed-upon price.
Forward date, expiration date, delivery date, maturity
date refe
Lecture 3
Chapter 1 (Tuckman)
Bond Prices & Discount Factors, and
Arbitrage
The Time Value of Money
$100 today worth more or less than $100 next
year? More.
Individual Value & Market Value
How to Extract `Market Measures of the Time
Value of Money implici
Lecture 4
Chapter 3 Yield to Maturity
Yield to maturity is the one rate such that the
discounted value of securitys cash flows at that
rate equals the securitys market price.
Yield to maturity is neither a measure of relative
prices nor a measure of a rea
Lecture 5
Chapter 9 Term Structure Models
Show how to price derivative securities relative
to a set of underlying securities by arbitrage
arguments.
Remember that the cash flows are not fixed.
The techniques of this chapter required strong
assumptions abo