Fall-02 EMBAF Zvi Wiener 02-588-3049 Fixed Income Instruments 1.

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Presentation transcript:

Fall-02 EMBAF Zvi Wiener Fixed Income Instruments 1

Zvi WienerFabozzi Ch 1 slide 2 Sources Fabozzi, “Bond Markets, Analysis and Strategies”, Prentice Hall. P. Wilmott, Derivatives, Wiley. Hull, White, Manuscript.

Zvi WienerFabozzi Ch 1 slide 3 Plan Pricing of Bonds Measuring yield Bond Price Volatility Factors Affecting Yields and the Term Structure of IR Treasury and Agency Securities Markets Corporate Debt Instruments Municipals

Zvi WienerFabozzi Ch 1 slide 4 Plan Non-US Bonds Mortgage Loans Mortgage Pass-Through Securities CMO and Stripped MBS ABS Bonds with Embedded Options Analysis of MBS Analysis of Convertible Bonds

Zvi WienerFabozzi Ch 1 slide 5 Plan Active Bond Portfolio Management Indexing Liability Funding Strategies Bond Performance Measurement Interest Rate Futures Interest Rate Options Interest Rate Swaps, Caps, Floors

Zvi WienerFabozzi Ch 1 slide 6 Characteristics of a Bond Issuer Time to maturity Coupon rate, type and frequency Linkage Embedded options Indentures Guarantees or collateral

Zvi WienerFabozzi Ch 1 slide 7 Time to Maturity Short-term – one to five years Intermediate-term – five to twelve years Long-term – more than twelve years

Zvi WienerFabozzi Ch 1 slide 8 Basic terms Principal Coupon, discount and premium bonds Zero coupon bonds Floating rate bonds Inverse floaters Deferred coupon bonds Amortization schedule Convertible bonds

Zvi WienerFabozzi Ch 1 slide 9 Embedded Options Call feature – the issuer can retire the debt Put provision – the bondholders option Convertible bond – the bondholder can exchange the bond Exchangeable bond allows conversion to securities issued by another firm

Zvi WienerFabozzi Ch 1 slide 10 Sectors Treasury sector: bills, notes, bonds Agency sector: debentures (no collateral) Municipal sector: tax exempt Corporate sector: US and Yankee issues – bonds, notes, structured notes, CP – investment grade and noninvestment grade Asset-backed securities sector MBS sector

Zvi WienerFabozzi Ch 1 slide 11 Basic Terms The Money Market Account LIBOR = London Interbank Offer Rate, see BBA Internet site FRA = Forward Rate Agreement Repos, reverse repos Strips = Separate Trading of Registered Interest and Principal of Securities

Zvi WienerFabozzi Ch 1 slide 12 Basic Terms gilts (bonds issued by the UK government) JGB = Japanese Government Bonds Yen denominated issued by non-Japanese institutions are called Samurai bonds

Zvi WienerFabozzi Ch 1 slide 13 Major risks Interest rate risk Default risk Reinvestment risk Call risk Currency risk Liquidity risk Risk risk

Zvi WienerFabozzi Ch 1 slide 14 Straight bond Floater

Zvi WienerFabozzi Ch 1 slide 15 Questions 1, 2, 3, 4, 5, 8, 10, 11, 12, 13, 14 Home Assignment Chapter 1