Chapter 1: Bond Prices‚ Discount Factors and Arbitrage 1. Use this list of Treasury bond prices as of January 15‚ 2013 (which should be taken as the current date for all the questions below except for question 7) to derive the discount factors for cash flows to be received in 0.5‚ 1‚ 1.5 and 2 years. Bond Price 6.0s of 7/15/13 102-15+ 5.0s of 1/15/14 103-7 3/4 8.0s of 7/15/14 107-24 4.0s of 1/15/15 100-23 1/2 Answer: (a) To find d(0.5) The equation from the 6.0s of 15 July
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5 5 105 A. Calculate the price of each bond assuming there are no arbitrage opportunities in the market. (That is‚ calculate the present value of each of the bonds.) B. Now suppose that in fact bond A is traded at $111.97 while bond B is traded at $91.41. Are there arbitrage opportunities in the market? If yes‚ how would you take advantage of them? [Assume that zero coupon bonds are traded.] C. Calculate the yields to maturity (or the interest/discount rates rn) from the discount factors
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market rates Example: Rate may be adjusted annually to the current T bill rate plus 2% * Major risk involved for floaters is due to the changes in the firm’s financial strength * Yield spread is fixed over life of security however if the firm’s strength deteriorates then investors would demand a greater yield premium * This makes the price of bonds to fall * Floaters do not adjust to changes in financial condition of the firm * For bonds‚ the price an investor would be willing
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FINS2624 S2 2012 Mockterm FAMILY NAME OTHER NAMES STUDENT ID SIGNATURE THE UNIVERSITY OF NEW SOUTH WALES SCHOOL OF BANKING AND FINANCE TIME ALLOWED: N/A To make sure that we can identify your exam if your student ID number is hard to read‚ please tick the boxes below to fill in your seven digit student ID number. Detailed instructions are on the next page. 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 M oc kt Page 1 of 21 Please see over er FINS2624 PORTFOLIO MANAGEMENT MOCK MID-TERM
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(Duration‚ convexity‚ sensitivity). However‚ these tools assume a parallel movement of the yield curve yet it happens that the yield curve changes in a form of a twist or a butterfly -these concepts will be explained later in the report-. So‚ as managing the risk of a portfolio I traced the evolution of the yield curve using a statistical tool named the Principal Component Analysis to see how frequently does the yield curve shift in parallel and if the duration‚ convexity‚ and sensitivity can be still used
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Implied CDS Spread and CDS-Bond Basis Richard Zhou†‡ August 15‚ 2008 Abstract We derive a simple formula for calculating the CDS spread implied by the bond market price. Using no-arbitrage argument‚ the formula expresses the bond implied CDS spread as the sum of bond price‚ bond coupon and Libor zero curve weighted by risky annuities. We show that the bond implied CDS spread is consistent with the standard CDS pricing model if the survival probabilities and recovery are consistent with the
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Revisiting the Financial Crisis: The Effect of Credit Shocks on Bond Yields Ram Yamarthy∗ New York University Mark J. Bertus Prize Winner From the financial crisis‚ it was apparent that traditional indicators such as real activity and inflation were insufficient to explain spikes in bond yields. I discover the effect of credit indicators on bond yields by estimating a Gaussian six-factor affine model of term structure. One of these factors is a credit variable that I construct using a principal component
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date t in the future‚ let Z(t; T ) be the value of $1 to be delivered at a later date T : (1.1b) Z(t; T ) = zero coupon bond‚ maturity T ‚ as seen at t. These discount factors and zero coupon bonds are the ones obtained from the currency’s swap curve. Clearly D(T ) = Z(0; T ). We use distinct notation for discount factors and zero coupon bonds to remind ourselves that discount factors D(T ) are not random; we can always obtain the current discount factors from the stripper. Zero coupon bonds Z(t;
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Chapter 1 Introduction to Capital Market 1. Capital Market Capital markets are financial markets for the buying and selling of long-term debt- or equity-backed securities over one year is traded. Security includes- shares‚ debentures‚ bonds etc. A key division within the capital markets is between the primary markets and secondary markets. In primary markets‚ new stock or bond issues are sold to investors‚ often via a mechanism known as underwriting. The main entities seeking to raise
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Besides‚ because zero-coupon bond is riskless‚ the bondholders are willing to hold it for long-term investment in order to diversity the portfolio. So it is important in the fixed income security market. If a bond trades at a discount‚ its yield to maturity will exceed its coupon rate. Zero coupon bonds always sells at a discount. The sensitivity of a bond’s price to changes in interest rates is measured by the bond’s duration. A bond with high durations，its price is highly sensitive to interest
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