Fall-02

Fixed Income Instruments 1 Zvi Wiener

02-588-3049

[email protected]

http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

EMBAF

Sources

Fabozzi, “Bond Markets, Analysis and Strategies”, Prentice Hall.

P. Wilmott, Derivatives, Wiley.

Hull, White, Manuscript.

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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

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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

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Plan

Active Bond Portfolio Management Indexing Liability Funding Strategies Bond Performance Measurement Interest Rate Futures Interest Rate Options Interest Rate Swaps, Caps, Floors

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Characteristics of a Bond

Issuer Time to maturity Coupon rate, type and frequency Linkage Embedded options Indentures Guarantees or collateral

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Time to Maturity

• Short-term – one to five years • Intermediate-term – five to twelve years • Long-term – more than twelve years

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Basic terms

• Principal • Coupon, discount and premium bonds • Zero coupon bonds • Floating rate bonds • Inverse floaters • Deferred coupon bonds • Amortization schedule • Convertible bonds

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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

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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

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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

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Basic Terms

• gilts (bonds issued by the UK government) • JGB = Japanese Government Bonds • Yen denominated issued by non-Japanese institutions are called Samurai bonds

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Major risks

• Interest rate risk • Default risk • Reinvestment risk • Call risk • Currency risk • Liquidity risk • Risk risk

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Straight bond Floater

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Home Assignment Chapter 1

Questions 1, 2, 3, 4, 5, 8, 10, 11, 12, 13, 14

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