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Fixed Income Instruments 1

Fixed Income Instruments 1. Zvi Wiener 02-588-3049 mswiener@mscc.huji.ac.il. Sources. Fabozzi, “Bond Markets, Analysis and Strategies”, Prentice Hall. P. Wilmott, Derivatives, Wiley. Hull, White, Manuscript. Plan. Pricing of Bonds Measuring yield Bond Price Volatility

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Fixed Income Instruments 1

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  1. Fixed Income Instruments 1 Zvi Wiener 02-588-3049 mswiener@mscc.huji.ac.il http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

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

  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 Fabozzi Ch 1

  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 Fabozzi Ch 1

  5. Plan • Active Bond Portfolio Management • Indexing • Liability Funding Strategies • Bond Performance Measurement • Interest Rate Futures • Interest Rate Options • Interest Rate Swaps, Caps, Floors Fabozzi Ch 1

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

  7. Time to Maturity • Short-term – one to five years • Intermediate-term – five to twelve years • Long-term – more than twelve years Fabozzi Ch 1

  8. Basic terms • Principal • Coupon, discount and premium bonds • Zero coupon bonds • Floating rate bonds • Inverse floaters • Deferred coupon bonds • Amortization schedule • Convertible bonds Fabozzi Ch 1

  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 Fabozzi Ch 1

  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 Fabozzi Ch 1

  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 Fabozzi Ch 1

  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 Fabozzi Ch 1

  13. Major risks • Interest rate risk • Default risk • Reinvestment risk • Call risk • Currency risk • Liquidity risk • Risk risk Fabozzi Ch 1

  14. Straight bond Floater Fabozzi Ch 1

  15. Home AssignmentChapter 1 • Questions 1, 2, 3, 4, 5, 8, 10, 11, 12, 13, 14 Fabozzi Ch 1

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