FINS1613 Lecture Notes - Lecture 4: Corporate Bond, Credit Risk, Yield Curve

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When a corporation/government wishes to borrow money from the public for at least one year, it is usually done by selling bonds. Issued by the australian treasury (or similar institution: thought of as (cid:858)risk-free(cid:859) in developed countries as there is almost no risk of the government defaulting and not making payments. Issued by corporations: thought of as risky as corporations may default on payments, the greater the default risk, the higher the coupon payment the corporation will pay to attract buyers. Credit risk is a measure of the default risk in bonds. Terminology: term: time remaining until final repayment date. Coupon bonds pay coupons periodically for n periods (until and including maturity), and on maturity face value is also paid. Bond value is the present value of all the above payments, i. e. bond value = pv(coupons) + The yield curve tells us the market interest rate per year for different maturity zero-coupon bonds.

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