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Interest rates are not entirely predictable but can be inferred from present interest rate prices. For example, when current interest rates are exceptionally low, future interest rates can be expected to rise and vice versa.

Question 2 Consider a two year coupon bond which pays an annual coupon of 5% with a principal value of $100. Using the zero coupon bonds B(0, 1) and B(0, 2):

1. What is the strategy to replicate the coupon bond?

2. What is the strategy to hedge the coupon bond?

PV of 2 year coupon bond = 5 B(0,1) + 105 B(0,2)

1. To replicate the bond, I should buy 5 units of B(0, 1) bonds and 105 units of B(0, 2) bonds.

2. To hedge the bond, I should do the opposite and sell 5 units B(0, 1) bonds and 105 units B(0, 2) bonds.

Question 3 Consider three zero coupon bonds; B(0, 1)=0.95, B(0, 2)=0.90, and B(0, 3)=0.85:

1. What is the zero rate term structure?

B(0,T) = e-rT/365 r(0,T) = -ln( B(0,T))365/T

r(0,1) = -ln 0.95 = 0.0513 r(0,2) = -(ln 0.90)/2 = 0.0527 r(0,3) = -(ln 0.85)/3 = 0.0542

2. What is the forward rate term structure at one year intervals? In other words, f(0, 1, 2) and f(0, 2, 3).

f(0,1,2) = B(0,1) / B(0,2) – 1 = 0.95/0.9 – 1 = 0.05556 f(0,2,3) = B(0,2) / B(0,3) – 1 = 0.90/0.85 – 1 = 0.05882

3. Name two other possible term structures that can be inferred.

The other term structures are discount rate and simple interest rate structures.

Question 4 The current date is January 9, 2003. The price of a Treasury bond with a 12% coupon that matures on October 12, 2009 is quoted as 102-07. What is the cash price? For the accrued interest, it has been 89 days since the last coupon (Jan 9, 2003 - Oct 12, 2002) with the entire interval between coupon payments being 182 days (April 12, 2003 - Oct 12, 2002).

Quoted Price = 102 + 7/32 = 102.21875

Accrued interest = 12% x…...

...Investment Analysis Meshanda Mitchell Acc 557 – Financial Accounting Strayer University Dr. Peter Nwaogu December 7, 2012 Investment Analysis In 1965, Pepsi Co was created through a merger of two companies Pepsi Cola and Frito Lay by Donald M. Kendall, President and Chief Executive Officer of Pepsi-Cola and Herman W. Lay, Chairman and Chief Executive Officer of Frito-Lay. Pepsi was originally founded in 1898 by Caleb Bradham, a New Bern, North Carolina, druggist, who first formulated Pepsi-Cola. Today, Pepsi is part of a portfolio of drinks that includes carbonated and non-carbonated drinks such as soft drinks, juices and juice drinks, ready-to-drink teas and coffee drinks, isotonic sports drinks, bottled water and enhanced waters. PepsiCo operates in four major fields. These fields include: PepsiCo Americas Beverages, PepsiCo Americas Foods, based in America PepsiCo Europe, and PepsiCo Asia, Middle East and Africa. The Pepsi-Cola Company is the world’s second largest beverage company. Pepsi-Cola beverages are available in about 170 countries. The product that has given the world its best-known taste was born in Atlanta, Georgia, on May 8, 1886. Dr. John Stith Pemberton, a local pharmacist, produced the syrup for Coca-Cola, and carried a jug of the new product down the street to Jacobs' Pharmacy, where it was sampled, pronounced "excellent" and placed on sale for five cents a glass as a soda fountain drink. Carbonated water was teamed with the new syrup to produce a...

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...International University 2013 VIETNAM FIXED INCOME MARKET Project for Fixed Income Securities course Hàn Khánh Phương Dương Khánh Ngọc Nguyễn Kim Ngân Nguyễn Phúc Trọng Phạm Lương Nữ Hoàng Table of Contents I. INTRODUCTION AND OVERVIEW THE VIETNAM FIXED INCOME MARKET 3 II. TIMELINE 4 III. VIETNAM’S PRIMARY MARKET AND SECONDARY MARKET 5 IV. STATE OF FIXED INCOME MARKET IN VIETNAM 6 I. INTRODUCTION AND OVERVIEW THE VIETNAM FIXED INCOME MARKET The bond market (also known as the credit, or fixed income market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. The "bond market" usually refers to the government bond market, because of its size, liquidity, relative lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve. The yield curve is the measure of "cost of funding". The Securities Industry and Financial Markets Association (SIFMA) classify the broader bond market into five specific bond markets. * Corporate * Government & agency. * Municipal *......

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...Lab 7 VBA Fixed Income Financial Model ------------------------------------------------- In this lab, you will start to build VBA application related to Fixed Income Financial Model Part 1: Commonly Used Financial Functions There are many EXCEL functions that you may use in FI Financial Modeling. In this lab, we explore the following functions: 1. RATE 2. PV 3. PRICE 4. YIELD 1. RATE The Rate function calculates the interest rate required to pay off a specified amount of a loan, or reach a target amount on an investment, over a given period. Alternately, it calculates the return you will have to earn in order to accumulate a certain amount of money by making a number of equal periodic investments. The syntax of the function is: RATE( nper, pmt, pv, [fv], [type], [guess] ) Where the arguments are as follows: nper | The number of periods over which the loan or investment is to be paid | pmt | The (fixed) payment amount per period | pv | The present value of the loan / investment | [fv] | An optional argument that specifies the future value of the loan / investment, at the end of nper payments . If omitted, [fv] takes on the default value of 0 | [type] | An optional argument that defines whether the payment is made at the start or the end of the period The [type] argument can have the value 0 or 1, meaning: 0 - the payment is made at the end of the period 1 - the payment is made at the beginning of the period If the......

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...Part Ⅰ Portfolio Overview Holding Period: 09/14/2010 ~ 11/30/2010 76 days Settlement Date: 09/14/2010 Position: 6 of 6 Part Ⅱ Securities Analysis *CN Government Bond 10-year is based on CNY. CNY per USD=6.74690 as of 09/14/10; CNY per USD=6.66730 as of 11/30/10 CNY per USD=6.64110 as of 10/15/10 1. CN Government Bond 10-Year The yield and price were relatively stable during the first 30 days of my holding period until Oct. 19th when the People’s Bank of China increased its benchmark rate by 0.25 percentage point on in order to take control of the stubborn inflation. The yield increased and the price fell. However Chinese RMB has been appreciating from 6.74590 USD/CNY to 6.66730 USD/CNY during my holding period. The foreign exchange gains partially offset the loss of market value of the bond. The rate of return is 1.269%. I will sell the bond because the Chinese government has potential to continuously increase the interest rate and besides the US dollar shows a strong appreciation trend recently. 2. US. Government Bond 10-Year There are several factors contributed to the fluctuation of the price and yield of Treasury. In early September, the interest rate for 2-7 year treasury notes have declined to record low level, causing the market value of the portfolio increased. The decline of the price of Treasuries at the end of September is due to profit-taking after recent gains. The yield surged and the price decreased after Fed announcement of QEⅡ. I......

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...Investment Criteria Analysis 1. Introduction: Any investment decision depends upon the decision rule that is applied under circumstances. However, the decision rule itself considers following inputs. Cash flows, Project Life, and Discounting Factor The effectiveness of the decision rule depends on how these three factors have been properly assessed. Estimation of cash flows requires immense understanding of the project before it is implemented; particularly macro and micro view of the economy, polity and the company. Project life is very important; otherwise it will change the entire perspective of the project. So, great care is required to be observed for estimating the project life. Cost of capital is being considered as discounting factor which has undergone a change over the years. Cost of capital has different connotations in different economic philosophies. Hence, determination of cost of capital would carry greatest impact on the investment evaluation. A number of capital budgeting techniques are used in practice. They may be grouped in the following two categories: - I. Capital budgeting techniques under certainty; and II. Capital budgeting techniques under uncertainty 2. Capital budgeting techniques under certainty Capital budgeting techniques (Investment appraisal criteria) under certainty can also be divided into following two groups: 2.1 Non-Discounted Cash Flow Criteria: - (a) Pay Back Period (PBP) (b) Return On Investment (ROI) 2.2...

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...Fixed Income Securities Tools for Today’s Markets Second Edition BRUCE TUCKMAN John Wiley & Sons, Inc. Copyright © 2002 by Bruce Tuckman. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: permcoordinator@wiley.com. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and speciﬁcally disclaim any implied warranties of merchantability or ﬁtness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and......

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...Fixed Income Risk Management Second Assignment QUESTION 1 Maturity 0.5 1 1.5 Interest Rate 0.01 0.016 0.02 0.022 Discount Factor 0.9940 0.9841 0.9704 0.9570 Pz(0.T) 99.4018 98.4127 97.0446 95.6954 2 Table 1- Zero option prices A. Given the current term structure of interest rates, we can easily derive the prices of zero-coupon bonds. As the interest rates are continuously compounded, the formulas used to calculate the discount factors and the zero prices are: ������(������, ������) = ������ −������(������,������)(������− ������) ������������ (������, ������) = 100 × ������(������, ������) B. Assuming Ɵi=1% and σ=1.50%, we can set up the Ho-Lee model, which implies the following 3-step interest rate tree (where each step is = 0.5): 1 1.20% 2.76% 0.64% 2 4.32% 2.20% 0.08% Table 2- Ho-Lee interest rate tree 3 5.88% 3.76% 1.64% -0.48% At each node, the interest rate was calculated using ������������+1,������ = ������������,������ + ������������ × ∆ + ������ × √∆ For upward movements, and ������������+1,������+1 = ������������,������ + ������������ × ∆ − ������ × √∆ For downward movements. The risk neutral probability of an upward or downward movement is set at p*=1/2. The model implied zero-coupon prices are then computed using the different step bond trees (Table 14 in the Appendix). The following table shows the comparison between the implied and the term structure zero-coupon prices for each maturity: the Check row contains the difference......

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... FINC3017 Investments and Portfolio Management Essay: Market Efficiency and Anomalies Topic：Stock price momentum: Jegadeesh and Titman (1993) Momentum anomaly and EMH Anomaly is a stock return deviation that challenge efficient market hypothesis (EMH). Jegadeesh and Titman (1993) theorise price momentum anomaly in the stock market for the first time. It contradicted to efficient market hypothesis thereby is widely debated. EMH states that no consistent excess return can be achieved since security prices fully reflect all available information (Fama 1970). Therefore, future prices cannot be predicted through technical analysis of past prices. If the hypothesis is true, passive investment strategy ought to be taken, because it is impossible to get abnormal return by aggressive trading. However, Jegadeesh and Titman show that stocks performed well over the previous 3 to 12 months tend to continue to perform well over 3 to 12 months holding periods. Buy past winners and short past losers earned statistically significant positive return of averaging 12.01% per year. Predictable price patterns and excess returns contradict the efficient market hypothesis. Investors and fund managers perform actively in pursuing abnormal profits. Literature review and the reason of anomaly A large number of literatures illustrate that momentum anomaly exist. Some important literatures are Chan, Jegadeesh and Lakonishok (1996), Conrad and Kaul (1998) and Moskowitz and Grinblatt (1999). Lee and......

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...at par an initial issue of bonds and held them to maturity. Over the maturity, the interest rates rose at which the coupons income was invested. Compare the realized return to the yield to maturity of bond at the time of purchase: B a. Realized return greater than YTM b. Realized return equal to YTM c. Realized return less than YTM d. Cannot infer from given information 2. XYZ Corp issues two bonds with 30-year maturities both of which are callable at $1100. The first bond is a deep discount bond issued at $500 has a coupon rate of 5% (semi-annual payments) and a yield to maturity of 7.4%. The other bond is issued at par value and its coupon rate is 8.6%. e. Find yield to maturity for second bond. If market rates are expected to fall drastically over time, which bond would investors prefer to hold? Why? i/y=8.6, 第二问不会 3. ABC Corp bonds trade at $960, have a face value of $1000 and 5 years to maturity. These bonds pay coupon rate of 7% with semi-annual payments. Calculate the following: f. Current yield 1000*7%/960=7.29% g. Yield to maturity (on BEY basis) and Effective yield to maturity Fv=1000, pv=-960, pmt=35, n=10, BEY=3.9930*2=8.00% h. Calculate the effective yield to maturity. EAY=(1=0.04)^2-1=8.16% i. Total return on bond for an investor with a 3-year investment horizon and a reinvestment rate of 6% annually over the period. Further, it is known that at the end of 3 years the 7%......

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...In the movie “Fixed” the type of meaning I got from the people playing in the movies was some of them wanted to get fixed while others seemed fine the way they were about their disability. What I mean by fixed, is some people wanted to change the way they looked and their ability to accomplish more. Some of the characters wanted to better themselves. For example one character would use some enhancement drugs to focus more and get moving, even though he didn’t need them. In the movie one character, states that some people say “Oh that I do not look good enough” Meaning people want to change something about them in order to fit in society and belong. It’s all the stereotypes and images that society sets for people. The type of people that would want to change the way they looked were, people who were not disabled at all. Like some individuals do not need drugs to help them focus or surgery to help them look better they are fine the way they are. The movie emphasizes on that part where people who are not disabled see themselves as disabled because of any issues they have physically or mentally they see any flaws they have as a problem and would like to fix it. Also in the movie I had a better understanding of why would some people want to kill themselves. Some people who are disabled or feel disabled feel as if they do not belong to the society. I notice this because people make disability a problem for disabled people. Cutting out access to them. Ellis Kathleen states......

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...FIN 443 Portfolio Report: Week 4 * Fixed Income * Japan’s Central Bank has instituted negative interest rates. It’s now the fifth major central bank to do so. * The Fed met after Japan’s decision and released a more conservative statement compared to their earlier actions of this year so far. * Treasury yields were down especially for the 5 and 10 year treasuries. * Last week the fed committee had a meeting and one of the biggest things that was observed from the meeting was that the committee will monitor global and economic development due to the recent uncertainty of potential global growth. * The fed had a general outlook for increasing interest rates, but for now they will be looking at income as a performance driver in the market. * Puerto Rico came up with a plan on Monday to reduce its debt by approximately 46%. Not many details about the plan were released, but from what we have found its obvious and of great importance to have great and high level of participation for all involved. Puerto Rico has by May first to pay the a large debt service payment. * FX * Preliminary Q4 earnings of Great Britain’s GDP indicated a .5% growth, totalling to 2.2% growth for the full year. * British exit from the European Union more likely as British voters fear immigration and instability of the EU. * The European Central Bank remains under pressure from financial markets to provide even more monetary......

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...at time 0 and holds it until maturity. • As the amounts of the payments she receives are diﬀerent at diﬀerent times, one way to summarize the horizon is to consider the weighted average of the time of the cash ﬂows. • We use the present values of the cash ﬂows (not their nominal values) to compute the weights. • Consider an investment that generates cash ﬂows of amount Ct at time t = 1, · · · , n, measured in payment periods. Suppose the rate of interest is i per payment period and the initial investment is P . 3 • We denote the present value of Ct by PV(Ct ), which is given by Ct . PV(Ct ) = t (1 + i) and we have P = n X (8.1) PV(Ct ). (8.2) t=1 • Using PV(Ct ) as the factor of proportion, we deﬁne the weighted average of the time of the cash ﬂows, denoted by D, as D = = n X t=1 n X t " PV(Ct ) P twt , # (8.3) t=1 where PV(Ct ) wt = . P 4 (8.4) P • As wt ≥ 0 for all t and n wt = 1, wt are properly deﬁned weights t=1 and D is the weighted average of t = 1, · · · , n. • We call D the Macaulay duration, which measures the average period of the investment. • The value computed from (8.3) gives the Macaulay duration in terms of the number of payment periods. • If there are k payments per year and we desire to express the duration in years, we replace t in (8.3) by t/k. The resulting value of D is then the Macaulay duration in years. Example 8.1: Calculate the Macaulay......

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...the holy Qur‟an and the Sunnah. Naturally, it remains deep in their hearts to fashion and design their economic lives in accordance with the precepts of Islam. The establishment of Islami Bank Bangladesh Limited on March 13, 1983, is the true reflection of this inner urge of its people, which started functioning with erect from March 30, 1983. Now, a question may arise- „what is Islami Banking?‟ According to OIC- “Islamic bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations.” This bank is the first of its kind in South-East Asia. It is committed to conduct all banking and investment activities on the basis of interest fee profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope towards materializing a long cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam. With the active co-operation and participation of Islamic development bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the Middle East and the gulf countries, Islami Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh. History of Islami Bank in Bangladesh In the late seventies and early eighties, Muslim......

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...© CSI GLOBAL EDUCATION INC. (2011) 7•1 Chapter 7 Fixed-Income Securities: Pricing and Trading © CSI GLOBAL 7•2 EDUCATION INC. (2011) 7 Fixed-Income Securities: Pricing and Trading CHAPTER OUTLINE How are Price and Yield of a Bond Calculated? • Calculating the Fair Price of a Bond • Calculating the Yield on a Treasury Bill • Calculating the Current Yield on a Bond • Calculating the Yield to Maturity on a Bond What is the Term Structure of Interest Rates? • The Real Rate of Return • The Yield Curve What are the Fundamental Bond Pricing Properties? • The Relationship Between Bond Prices and Interest Rates • The Impact of Maturity • The Impact of the Coupon • The Impact of Yield Changes • Duration as a Measure of Bond Price Volatility What are Bond-Switching Strategies? How does Bond Market Trading Work? • Clearing and Settlement • Calculating Accrued Interest © CSI GLOBAL EDUCATION INC. (2011) 7•3 What are Bond Indexes? • Canadian Bond Market Indexes • Global Indexes Summary LEARNING OBJECTIVES By the end of this chapter, you should be able to: 1. Defi ne present value and the discount rate, and perform calculations relating to the time value of money, bond pricing and yield. 2. Defi ne a real rate of return and a yield curve, and evaluate three theories of interest rate determination. 3. Analyze the impact of fi xed-income pricing properties on bond prices. 4. Explain the rationale for bond switching and describe bond-switching......

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...Fixed-Income Portfolio Selection Kay Giesecke∗ and Jack Kim† Stanford University June 29, 2009; this draft January 11, 2012‡ Abstract The equity portfolio selection problem is the subject of a substantial literature. Though equally important in practice, the selection problem for a ﬁxed-income portfolio of corporate and government bonds, industrial loans and credit derivatives, is less well-understood. The ﬁxed-income portfolio problem presents unique challenges: the risk of issuer default induces skewed return distributions, the correlation of defaults inﬂuences the tail of the portfolio return distribution, and credit derivative positions have complex risk/return implications. This paper addresses the static selection problem for a ﬁxed-income portfolio. We optimize the total mark-to-market value of the portfolio at the investment horizon. This value incorporates the intermediate premium and default cash ﬂows of long and short cash and derivative positions, and the survival-contingent market value of these positions at the horizon. The selection problem is cast as a polynomial goal program that involves a two-stage constrained optimization of preference weighted moments of the portfolio mark-to-market. The decision variable is the vector of contract notionals. A capital constraint guarantees the solvency of the investor. The multi-moment formulation addresses the non-Gaussian distribution of the portfolio mark-tomarket. It is also computationally tractable, because we......

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