Bond Market. Time Value of Money & Discounting Debt security is claim on specific stream of income (fixed income) Present value of $1 to be received in.

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Presentation transcript:

Bond Market

Time Value of Money & Discounting Debt security is claim on specific stream of income (fixed income) Present value of $1 to be received in one year? Risks Market Credit Liquidity Legal Discount Rate & Discount Factor

Day Count & Payment Frequency Convention is to quote rate on annual basis Day count basis Money Market Bond Market Actual/30 30/360 Actual/Actual Government Bond (Treasuries) Corporate Bond Municipalities

Short Term Interest Rate T-Bill London Inter Bank Offered Rate (LIBOR) Spot Forward Convention Arbitrage Pricing Linear Interpolation

Long-term Bonds Market Risk and Bond Prices Treasury Convention Issuance Process Corporate Bond Issuance Process Bond price and Yield Yield to maturity Yield to call

Duration & Convexity Measuring sensitivity to change in yield Macaulay’s Duration Modified Duration Duration of portfolio Weighted Numerical Convexity is second derivative

Duration & Price Sensitivity

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