FNCE30001 Lecture 7: Fixed Income Valuation
27 Jun 2018
School
Department
Course
Professor
Fixed Income Valuation
ununrunnnnunmmm
www.rsafisudincomerecunity
Four
characteristics the inner borrower promisestorepay
theinvestor lender
theamountborrowed l
principal
1
price1
farvalue
interest
specific
pointsintime
Whoisinvolved Inners govt financialintermediaries corporations
Invertors investment awiper
funds individuals
Others creditratingagencies regulatorsaindustrybodies
Bondtyhest
FisiedConfanBondsz
Makes two kindsof
fragments
iParvalue lfacevalued received at maturity
ii Interest coupon
payments received atspecifiedintervals
CapitallndenBondst
Same as fixed
coupon
bond except thatforvaluedcoupon
fragmentsare stated in
realterms
Aan adjustment ismadeateach
woupon
date
FloatingrateNotts
hike afixedcouponbondin termsof
paymentschedule
BUT
couponrate is notfixed Eachcoupon
paymentislinkedto ashortterminterest
rate current at the beginningofthe
coupon
period
ofinternet
ratesriseduringthelifeofthebond coupon
paymentsalsorice
ConvertibleBondslnoted
afinedcouponband w
1the
optiontoconvert toshares maturity
Worth more than an equivalent
straightbond because
theoptionhas value
mayshowup as alowercouponinterestrate
Inventor will choosethe
better
dealbaredonrtated ofsharesAshare
fuice maturity
CallableBondst
afixedcouponbondwltheborrower
optiontorepaybonds
early
Must be worthlessthan anotherwireequivalent
straight
band
mayshow
up as ahighercouponrate
Borrower
mayrepay
earlyifinterestrates
have
fallen
Zwo confanBondsllmtruments
AKAPareDiscountsecurit
Onlyone can flow1
far value at maturity
shortterm debtrecunities
lymerally 4year doesnotpaycoupons
lyear payscoupons
Document Summary
Fourcharacteristics ununrunnnnunmmm the inner borrower promisestorepaytheinvestor lender theamountborrowed lprincipal1price1farvalue interest specificpoints intime. Makes two kindsoffragments i parvalue lfacevalued received at maturity ii. A an adjustment ismadeateachwoupondate hike a fixedcouponbondin termsofpaymentschedule. Butcouponrate is notfixed eachcouponpaymentislinkedto a shortterminterest rate current at the beginningofthecouponperiod ofinternetratesriseduringthelifeofthebond couponpaymentsalsorice afinedcouponband w1theoptiontoconverttoshares maturity. Worth more than an equivalentstraightbond becausetheoptionhas value mayshowup as a lowercouponinterestrate. Must be worthlessthan anotherwireequivalentstraightband mayshowup as a highercouponrate. Onlyone can flow1far value at maturity short term debtrecunities lymerally 4year doesnotpaycoupons. Pricingfero amdeterminingtheprice themhttakesintoaccount timetomaturity a defaultmilloftheborrower t tax h liquidityinthesecondarymist47. Zoe zerocouponinterestratef afront o to til do micauntfactorfromtime0totunet. 1 w t got is calledthe tyourzerocouponrate zeroratesareon acompoundinterestbasisregardlessofterm 9arequotedf a. Pope got pathfork i jot4 if i bw t rt lt. It s x s n days tomaturity s wimpleannualinterestrate1yield. Thespropattamroop lotofzerocouponrates verticalagainsttermtomaturity horizontal zoorates arebared on compoundintent zeroratecurve is nottheyieldcurve. Uringthegrokatecurvej ftp. t ego t can easilyvalueunigle or multiplecashflowbonds. Tovalue afriedcouponbond we can treat it like aportfolioofzeros t 457.
