Escolar Documentos
Profissional Documentos
Cultura Documentos
Goal:Toprovideparticipantswitha
workingknowledgeof
Fixedincomemarkets
Interestrates
Interestratederivatives
CourseIntroduction
Method:Focusonpractice
Lectures
Examples
Reviews
Quickchecks
Exams
CourseOverview
PartI:Fixedincomemarkets
Moneymarkets
Bondmarketsandbondpricing
Bondpricevolatility
Interestratesandthetermstructure
Bondportfoliomanagement
ExamI
CourseOverview
PartII:Derivatives
Assetbackedsecurities
Optionpricing
Pricingbondswithembeddedoptions
Interestratefutures
Interestrateoptions
InterestrateswapsandFRAs
ExamII
CourseMaterials
Textbook
BondsandBondDerivatives,byMiles
Livingston
Software
MicrosoftExcelspreadsheets
Howtocontactme
Email:spindt@mailhost.tcs.tulane.edu
Web:http//:elvis.sob.tulane.edu
ObjectivesforSession1
Tounderstandwhatarefixedincomesecurities
Toseehowfixedincomesecuritiesaretraded
Toidentifytheimportantplayersinfixed
incomemarkets
Tounderstandwhatarefixedincome
derivatives
WhatsFixedIncome?
Fixedincomesecurities
Financialclaims
Principleandpossiblycoupons
Contractuallydefinedcashflows
Defaultprovisions
Covenants
WhatsFixedIncome?
Inotherwords:
Fixedincomesecuritiesare
debtcontracts
Example
Commercialpaper
Unsecuredpromissorynote
Specificmaturity;shortterm
Paysthefaceamountatmaturity
Soldatadiscount
Issuedbycorporations
Example
Couponbond
Specifiesperiodicpayments(coupons)until
maturity
Atmaturity,principalamountisrepaid
Soldatornearpar
Maybesecuredorunsecured
Governedbyanindenture
Issuedbyvariousagencies
BondExample
11.75%RepublicofColumbiadollarbond
of022520
Issued$750millionprincipal022500
Pays11.75%/2=5.875%semiannually
Matures022520
Repaysprincipalatmaturity
Isnotcallable
Example
Amortizingbond
Periodicpaymentsincludeinterestand
principal
Principalisrepaidovertime
Paymentsmaybelevelorvariable
Mortgageloansaretypicallyamortizing
Review
Typesofcashflows:
$15,000
$10,000
$5,000
$Mar-00
Apr-00
May-00
Jun-00
Jul-00
Aug-00
Sep-00
Oct-00
$10,000.00
cash outflow
to repay debt
at maturity
$(5,000)
$(10,000)
$(15,000)
Nov-00
Review
Typesofcashflows:
$15,000
$10,000
$5,000
$3/2/00
$(5,000)
9/2/00
3/2/01
9/2/01
3/2/02
$500 cash
outflow at
each coupon
date
$(10,000)
$(15,000)
9/2/02
Review
Typesofcashflows:
A180monthlevelpayamortizingbond
$2,500.00
$2,000.00
$1,500.00
Principal
Interest
$1,000.00
$500.00
$0.00
Risks
Fixedincomesecuritiesinvolveriskaswell
asreturn
Creditrisk
Interestraterisk
Liquidityrisk
Otherrisks
BondRatings
Rating
Highestquality
Highquality
Uppermediumquality
Mediumgrade
Somewhatspeculative
Lowgrade,speculative
Lowgrade,default
possible
Lowgrade,partial
recovery
Default,recovery
unlikely
S&P
AAA
AA
A
BBB
BB
B
CCC
Moodys
Aaa
Aa
A
Baa
Ba
B
Caa
CC
Ca
QuickCheck
Whatarefixedincomesecurities?
Describethreetypesoffixedincomecash
flows.
Identifythekeyrisksassociatedwithfixed
incomesecurities.
Whatarebondratings?
FixedIncomeMarkets
Themoneymarket
Shortterm,highlyliquid,lowrisk
Wholesaletrading
Thebondmarket
Longterm,variedliquidity,variedrisk
Wholesaleandretailtrading
NewIssues
Newissuesaresoldintheprimarymarket
IssuerssellFIsecuritiestoraisemoney
Debtv.Equity(cost;flexibility;purpose)
Sellersinclude
Sovereigngovernments
Othergovernmentalunits
Quasigovernmentagencies
Corporations
NewIssues
Newissuesaresoldintheprimarymarket
PurchasersbuyFIsecuritiestoinvestmoney
Debtv.Equity(risk/return;cashflowtiming)
Investorsinclude
Institutions
Financialcorporations
Nonfinancialcorporations
Wealthyindividuals
PlacingNewIssues
Somenewissuesaresolddirectlytoinvestors
Auctions:USgovernmentbondsorCETES
Negotiatedsale:Federalfunds,Eurodollars
Mostbondissuesaresoldindirectlyto
investors
Firmcommitmentunderwriting
Besteffortssale
Privateplacements
Rule144a
Auctions
Callauctions
Valuesandinformation
Openoutcry
English(ascendingprice)
Dutch(descendingprice)
Sealedbid
firstorsecondprice
discriminatory
Winnerscurse
Example:TBillAuction
Schedule
Tenders
Noncompetitive
Competitive
Allocationrule
topprice
stopoutprice
averageprice
Tailandcover
Example:TBillAuction
Tenders and Awards for the 91-day Tbill Issued
May 11, 1989 (CUSIP No. 912794 TD 6)
Dollar amounts in thousands
Issue Size
Noncompetitive Bids
Competitive Allocation
Competitive Tenders
Competitive Cover
Total Cover
Auction Tail (lower)
Auction Tail (upper)
$8,483,509
$3,120,100
$5,363,409
$15,094,215
2.81
2.15
0.02%
0.04%
37%
63%
Example:TBillAuction
Discount
7.90%
7.91%
7.92%
7.93%
7.94%
7.95%
7.96%
7.97%
Price
98.003
98.001
97.998
97.995
97.993
97.990
97.988
97.985
Tenders
$2,025
$25,355
$66,835
$810,000
$1,505,000
$2,835,000
$3,252,000
$6,598,000
$15,094,215
Awarded
$2,025
$25,355
$66,835
$810,000
$1,505,000
$2,835,000
$119,194
$0
Remaining
$5,361,384
$5,336,029
$5,269,194
$4,459,194
$2,954,194
$119,194
$0
$0
% Awarded
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
3.67%
0.00%
Weight
0.04%
0.47%
1.25%
15.10%
28.06%
52.86%
2.22%
0.00%
7.94%
Example:TBillAuction
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
7.90%
7.91%
7.92%
Tenders
7.93%
Awarded
7.94%
7.95%
7.96%
7.97%
$6,000,000
$7,000,000
UnderwrittenOfferings
Presaleactivities
SECregistration
Theroadshow
Pricing
Attheofferingdate
Purchasebyunderwriter
Distributiontoinvestors
SeasonedIssues
Tradedinthesecondarymarket
Organizedexchanges
Centralizedtradingpost;membersonly
Listingrules
NYSEspecialistsystem
OTCmarket
Dealers
Automatedquotingsystems
MarketMaking
Pricequotes
insidemarket
outsidemarket
Dealerinventories
tradingneeds
informationalproblems
financingconsiderations
Thebidaskspread
depth
QuickCheck
Whoarethemainplayersinthefixedincome
market?
DescribetheUSTreasurybillauctionprocess.
Whatroledounderwritersplayintheprimary
marketforfixedincomesecurities?
Howisthesecondarymarketforfixedincome
securitiesorganized?
Derivatives
Whatsaderivative?
Asecuritywhosevaluederivesfromthevalue
ofsomeothersecurity
Examples
Assetbackedsecurities(cashflowderivatives)
Options
Forwards,Futures,Swaps