Class Notes (976,507)
CA (575,531)
UOIT (1,987)
BUSI (226)
BUSI 3410U (20)
Bin Chang (14)
Lecture 6

BUSI 3410U Lecture 6: Lecture 6

3 Pages
52 Views
Winter 2013

School
UOIT
Department
Business
Course Code
BUSI 3410U
Professor
Bin Chang
Lecture
6

This preview shows page 1. Sign up to view the full 3 pages of the document.
Lecture 6: Fixed Income Securities
Financial Institutions
Four types of Credit Market Instruments → Siple loa, Fied paet loa,
- Coupon Bond
o The yield to maturity is the interest rate that equates the PV of the CF payments received from a
debt instrument with its value today
o The price of a coupon bond and the YTM are negatively related
1. Sold at pa→ he the oupo od is pied at its FV, YTM euals the oupo ate
2. Sold at disout→ YTM is geate tha the oupo ate he the od pie is elo its FV
3. Sold at Peiu→ YTM is less tha the oupo ate hen the bond price is above its F
o Cosole → od ith o atuit date that does ot pa piipal ut pas fied oupos foee
- Discount Bond: one year bond
o Bond without coupons
o YTM equals the increase in price over the year divided by the initial price
o Yield on a Discount Basis
idb = (F P) /P x 365/(days to maturity)
Negative Interest Rates in Japan
- Nov 1998, interest rates on Japanese 6-months T-bills = - 0.004% with investors paying more for the bills
- Weakness of Jap economy and a negative inflation rate drove interest rates to low levels; 2 factors cannot
explain negative rates
- Reaso→ lage iestos foud it oe oeiet to hold theses 6o ills as a stoe of alue athe tha
holding cash
o Bills are denominated in large amounts and can be stored electronically
o Convenience of T-bills result in interest rates changing slightly (below)
Negative interest rate Sweden July 2009
- Riksbank fixed interest rates at -0.25% on certain deposits kept by the commercial banks at the central bank
- Negatie ate, aks ae effetiel fied if the hoad uused fuds i the etal ak’s offes
o Way to punish them for a conservative lending policy at a time when authorities want to ensure the
economy gets easy credit
- Banks are usually paid interest on these deposits
Interest Rate Risk
- Risk that a od’s pie ill hage eause iteest ates hage
- Volatile refers to the % change of price
- Prices for LT bonds are more volatile than those for ST bonds
- Prices for low-coupon bonds are more volatile than those for high-coupon bonds
- There is no interest-rate risk for any bond whose time to maturity matches the holding period
Determining the Quantity Demanded of an Asset
- Wealth→ total esoues oed  the idiidual, including all assets ( both increases)
- Epeted etu→ E  oe the et peiod o oe asset elatie to alteatie assets ( both increases)
- Risk→ degee of uetait assoiated ith etu o oe asset elatie to alteatie assets (negatively
correlated)
- Liuidit→ ease/speed which asset can be turned into cash relative to alternative assets (both increases)
Supply and Demand for Bonds
- At lower prices(higher interest rates), the quantity demanded of bonds is higher an inverse relationship
- At loe pies highe iteest ates, the uatit supplied  ods is loe → a positie elatioship
Market Equilibrium
- When Bd = Bs euiliiu
- When Bd > Bs → eess dead; pies ill ise, ad iteest ates ill fall
- When Bd < Bs → eess supply; price will fall and interest rates will rise
find more resources at oneclass.com
find more resources at oneclass.com

Loved by over 2.2 million students

Over 90% improved by at least one letter grade.

Leah — University of Toronto

OneClass has been such a huge help in my studies at UofT especially since I am a transfer student. OneClass is the study buddy I never had before and definitely gives me the extra push to get from a B to an A!

Leah — University of Toronto
Saarim — University of Michigan

Balancing social life With academics can be difficult, that is why I'm so glad that OneClass is out there where I can find the top notes for all of my classes. Now I can be the all-star student I want to be.

Saarim — University of Michigan
Jenna — University of Wisconsin

As a college student living on a college budget, I love how easy it is to earn gift cards just by submitting my notes.

Jenna — University of Wisconsin
Anne — University of California

OneClass has allowed me to catch up with my most difficult course! #lifesaver

Anne — University of California
Description
Lecture 6: Fixed Income Securities Financial Institutions Four types of Credit Market Instruments Simple loan, Fixed payment loan, Coupon Bond o The yield to maturity is the interest rate that equates the PV of the CF payments received from a debt instrument with its value today o The price of a coupon bond and the YTM are negatively related 1. Sold at par when the coupon bond is priced at its FV, YTM equals the coupon rate 2. Sold at discount YTM is greater than the coupon rate when the bond price is below its FV 3. Sold at Premium YTM is less than the coupon rate when the bond price is above its F o Console bond with no maturity date that does not pray principal but pays fixed coupons forever Discount Bond: one year bond o Bond without coupons o YTM equals the increase in price over the year divided by the initial price o Yield on a Discount Basis idb = (F P) P x 365(days to maturity) Negative Interest Rates in Japan Nov 1998, interest rates on Japanese 6months Tbills = 0.004 with investors paying more for the bills Weakness of Jap economy and a negative inflation rate drove interest rates to low levels; 2 factors cannot explain negative rates Reason large investors found it more convenient to hold theses 6mo bills as a store of value rather than holding cash o Bills are denominated in large amounts and can be stored electronically o Convenience of Tbills result in interest rates changing slightly (below) Negative interest rate Sweden July 2009 Riksbank fixed interest rates at 0.25 on certain deposits kept by the commercial banks at the central bank Negative rate, banks are effectively fined if they hoard unused funds in the central banks coffers o Way to punish them for a conservative lending policy at a time when authorities want to ensure the economy gets easy credit Banks are usually paid interest on these deposits Interest Rate Risk Risk that a bonds price will change because interest rates change Volatile refers to the change of price Prices for LT bonds are more volatile than those for ST bonds Prices for lowcoupon bonds are more volatile than those for highcoupon bonds There is no interestrate risk for any bond whose time to maturity matches the holding period Determining the Quantity Demanded of an Asset Wealth total resources owned by the individual, including all assets ( both increases) Expected return E(r ) over the next period on one asset relative to alternative assets ( both increases) Risk degree of uncertainty associated with return on one asset relative to alternative assets (negatively correlated) Liquidity easespeed which asset can be turned into cash relative to alternative assets (both increases) Supply and Demand for Bonds At lower prices(higher interest rates), the quantity demanded of bonds is higher an inverse relationship At lower prices( higher interest rates), the quantity supplied by bonds is lower a positive relationship Market Equilibrium When B = B equilibrium When B > B excess demand; prices will rise, and interest rates will fall d s When B < B excess supply; price will fall and interest rates will rise
More Less
Unlock Document

Only page 1 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

You've reached the limit of 4 previews this month

Create an account for unlimited previews.

Already have an account?

Log In


OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit