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
PracticeQ
Totheholderofalongposition,itismoredesirabletoownaforwardcontractthana
futurescontractwheninterestratesandfuturespricesare:
A. negativelycorrelated.
B. uncorrelated.
C. positivelycorrelated
Volume6DerivativesandAlternativeInvestment
Futureandforwardvalue:
Assetw/ocostofcarry:
VT(T)=STF0(T)
[VT(T):valueofforwardcontractatexpiration,F0(T):forward
price]
Vt(T)=StF0(T)(1+r)(Tt) [value of for
PracticeQ3
ForaEuropeancalloptionwithtwomonthsuntilexpiration,ifthespotpriceisbelow
theexerciseprice,thecalloptionwillmostlikelyhave:
A. zerotimevalue.
B. positivetimevalue.
C. positiveexercisevalue.
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 initi
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
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
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 valuati
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
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 d
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 Extr
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 neit
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 tec