Fixed Income Flashcards
Definition
fixed terms refering to schedule & amounts
terms of debt instruments are often determined
generally they pay –> return on fixed scheduled
Bonds, Funds, ETFs, CDs, MM funds
Bond Characteristics
Debt security
issuer owes the holder of bond a debt
Obligation to pay interest (coupons) and repay principal at later due (maturity date)
interest usually payable at fixed interval
Main types of Bonds
Bills
Nominal Bonds
ZCB
Inflation-linked Bonds
Basics
dirty price/ cash price = clean Price + accrued interest quotes in clean price (% of PV) day count = ACT/ACT settlement = T+2
Bond Yield
single discount rate than when applied to all future CF
= PV of CF generated by Debt
= Bond Price
Modified Duration
% variation in Price given a 1 basis point variation in yield
DVO1
Risk = Duration * Price
Price Value of a Basis Point
absolute variation in Price given a 1 BP variation in yield
Types of Bonds
depends on ownership nature
public –> diff states
private –> Corporations
SSA –> mix
Government Bond Yield Curve
line plotting outstanding bonds (not matured) of given country with differing maturity dates at given point in time
Why do Bonds Exist?
Origin
financial transaction (2 sided of deal) thus 2 reasons two exchange bonds
a) one needing money (issue bond)
b) creditors buy bonds (investing money so as to receive future CF)
Others Reasons for Bond Trading
speculation ,arbitrage, intermediation
alternative to park cash (short term)
diff. types of bonds (diff. issuers and diff, investors interest)
a) corporate provides higher yields (more attractive)
b) entities raise money (new projects, fund operations, refinance existing debt)
Bonds PROS
predictable stream of income when stocks perform poorly
great saving vehicle you if you don´t want to put your money at risk
diversify sources of funding
carry-out specific fin-management strategy (min- financial cost, match revenue- expense, control risk)
Natural Buyers
Sovereign wealth funds
Central Banks
Investment Funds (pension, monetary, hedge)
Individuals
Main Sellers
Public - governments, Subsovereign, Supranationals, Agencies
Private - financials, corporates
All BONDS have in common….
debt security which entitles owner to receive 2x
without having ownership/ managerial control over the issuer
