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Bonds and Swaps

Outline. Coupon bondsCurrency swapFixed/floating swaps. Software. bondvar.mbpswaphist.mbpswapbs.mfixfloat.m. Bond Pricing: Assumptions. Flat term structureYieldsGeometric random walkRate = Tbond 5% (risk spread)Volatility = 1.75*tbond volatility. Bond Structure. Principal = 1000Coupon =

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Bonds and Swaps

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    1. Bonds and Swaps FIN285a: Lecture 5.1a Fall 2008

    2. Outline Coupon bonds Currency swap Fixed/floating swaps

    3. Software bondvar.m bpswaphist.m bpswapbs.m fixfloat.m

    4. Bond Pricing: Assumptions Flat term structure Yields Geometric random walk Rate = Tbond + 5% (risk spread) Volatility = 1.75*tbond volatility

    5. Bond Structure Principal = 1000 Coupon = 8% = 80 (starting in 1 year) Maturity = 3 years Problem: Find VaR and ETL over 1 year period

    6. Matlab Program bondvar.m Features Government bond data file Aggregate 12 months to get 1 year changes

    7. Outline Coupon bonds Currency swaps Fixed/floating swaps

    8. Currency Swap Foreign currency swap Trade principal and interest in one currency for another Borrow British pounds, lend US dollars Structure Long $ bond Short BP bond

    9. Valuation of Swap

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