By Moorad Choudhry
This ebook describes and defines bonds in the context of the capital markets and the different sorts of bonds which are traded. It incorporates a targeted examine the analytical options utilized in the industry via investors and fund managers. This re-creation will replace the part on swaps and hazard administration, replace all workouts and examples, upload a brand new part on credits derivatives, upload a bit on dependent finance securities & upload a bit on buying and selling. Contents additionally comprise: Bond yield dimension, rate of interest probability, the united kingdom gilt industry and company debt markets, probability administration, Off-balance sheet tools, together with swaps and strategies, and out of the country and rising markets.
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Extra resources for An introduction to bond markets
Financial arithmetic: The time value of money Bond prices are expressed ‘per 100 nominal’ – that is, as a percentage of the bond’s face value. 00, this means that for every $100 of the bond’s face value, a buyer would pay $98. The principles of pricing in the bond market are the same as those in other financial markets: the price of a financial instrument is equal to the sum of the present values of all the future cash flows from the instrument. The interest rate used to derive the present values of the cash flows, known as the discount rate, is key, since it reflects where the bond is trading and how its return is perceived by the market.
Comparable bonds have similar discount rates. The following sections explain the traditional approach to bond pricing for plain-vanilla instruments, making certain assumptions to keep the analysis simple. INTRODUCTION TO BONDS 9 Present value and discounting Since fixed-income instruments are essentially collections of cash flows, it is useful to begin by reviewing two key concepts of cash flow analysis: discounting and present value. Understanding these concepts is essential. In the following discussion, the interest rates cited are assumed to be the market-determined rates.
This involves estimating a value for r and INTRODUCTION TO BONDS 25 calculating the price associated with it. If the calculated price is higher than the bond’s current price, the estimate for r is lower than the actual yield, so it must be raised. This process of calculation and adjustment up or down is repeated until the estimates converge on a level that generates the bond’s current price. To differentiate redemption yield from other yield and interest-rate measures described in this book, it will be referred to as rm.