1.  Fixed Income

2. What is fixed income?  When you hear fixed income what do you think about?  A type of investing or budgeting style for which real return rates or periodic income is received at regular intervals at reasonably predictable levels

3. Who uses fixed income?  Retail investors  Retirement accounts  Pensions

4. Types of Fixed Income  Annuities  Tax-Exempt Bonds  Taxable Bonds  MBSs, CDOs, CMOs, MSRs

5. Annuities  Sold by financial institutions  Accept and grow funds  Payment later  Accumulation phase  Annuitization phase

6. Structure  Principal + Accumulated Returns  Guaranteed  Index Based  Tax Benefits

7. Present Value  An individual wants to determine how much money she would need to put away to have $100 on year from today  What we need?

8. PV of Annuity Formula 0AAA A A AA A F i Discounting to Present Time

9. FV of Annuity

10. Present Value of an Annuity  Use Future Value to get Present Value  Discount

11. Present Value of an Annuity  Substitute in the Future Value

12. Bonds  A debt investment in which an investor loans money to an entity which borrows the funds for a given period of time at a variable or fixed interest rate  Used to finance capital expenditure  Owners referred to as debtholders or creditors of the issue

13. Components of Bonds  Interest rate (Coupon)  Principal  Maturity Date  Issue Price  At par  Face Value  Intrinsic Value

14. Types of Bonds  Zero Coupon  Convertible  Callable  Non-Callable

15. Zero Coupon  No regular coupon payments  Issued at a discount to market  Market price converges to face value

16. Convertible  They are bonds with an embedded call option  Allows bondholders to convert debt into equity  Attractive conversion

17. Callable  Company can call back bonds from debt holders  Interest rate decrease  ReFi  Usually traded at a premium

18. Features of Bonds  Credit Quality  Yield  Pricing  Duration

19. Credit Quality  Each bond has a credit rating  Indicates likelihood of default  Moody’s, S&P, and Fitch

20. Ratings

21. Yield  Amount of return an investor will realize on a bond  Nominal Yield  Current Yield  Yield Curve

22. Treasury Yield Curve

23. Bond Pricing  Premium, Discount, or Par  Calculating max you want to pay  Fundamentally: the price of a bond is the sum of the present values of all coupon payments plus the present value of the par value at maturity

24. Pricing Formula (Basic)

25. Pricing Formula (Annuity Incorporation)

26. Duration  Measures price sensitivity to change in interest rates  Longer maturity = more sensitive  Expressed as a number of years  Rising interest rates = falling bond prices  Falling interest rates = rising bond prices

27. Duration Formula

28. Types of Bonds  Treasuries  TIPS  Municipalities  Sovereign  Corporate  Many More…..

29. Bond Market Size