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    Class 4 - Fixed Income

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    Terentius Fong

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    © All Rights Reserved
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    Class 4 - Fixed Income

    Uploaded by

    Terentius Fong
    2 views3 pages

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    2 views3 pages

    Class 4 - Fixed Income

    Uploaded by

    Terentius Fong

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Class 4: Fixed Income Analysis and Strategies

     Exposure:
    o Primary Market: Issuance of new securities
    o Secondary Market: Resale market / OTC investors
     Tenor:
    o Money Market: Short term debt instruments (maximum one year)
    o Capital Market: Long Term instruments (Maturity more than one year)
     Money Market Instruments
    o Large minimum transaction: $250k
    o T-Bills / Certificates of Deposit / Repurchase Agreements / Commercial Papers
    / Banker’s Acceptances
     Price Quote
    o Effective Yield (annualized) = (Face value – Purchase Price / Face Value) x (No
    of Days in Base Year / No of Days to Maturity)
     Par Value  $1,000 per bond
    o Above Par = Premium bonds
    o Below Par = discount bonds
    o At Par = Par Bonds
     Coupons
    o Floating Rate Note
     Every time period, the rate resets
    o Step up Bond / Fixed to Floating Bond
     Used in conjunction with a callable feature
     Step up happens if the bond is not called
    o Zero Coupon Bond
     Traded at a discount, matures at par
     Profit from the gap between price and par’
     Maturity and Termination
    o Perpetual Securities
     Price of Perp = (Coupon Rate) / (Discount Rate of Yield)
    o Callable Bonds
     Selling call options to issuer
    o Puttable Bonds
     Buying embedded put option
     Investor can get issuer to redeem when interest rates go up
    o Convertible Bonds  converting is bondholder right
    o Contingent Convertible Security (CoCo)  issuer/regulator right to convert
     Eg bond converted to equity during distress
     Bad for bondholder = higher interest
     Bonds can be classified according to credit quality
    o Investment Grade
    o Non Investment Grade / High Yield / Junk bonds
    o Unrated / Non-rated bonds
    o Secured Senior Bonds
    o Subordinated Bonds
    o Covered Bonds
    o Mortgage backed security
     Credit Spread
    o Bond yield vs risk free bond yield = Credit Spread
    o In crisis, people want govt bonds (price up yield down) and abandon
    corporate bonds (price down yield up) so credit spread gets bigger
     Credit Enhancement
    o Improve credit rating of the issuer
     Dedicated sinking fund to sustain interest and principal payments
     Specified assets as collateral or security for the bond
     Parental guarantee
     Letter of Comfort
     Pooling of lower quality bonds into higher quality bonds
     Purchasing credit insurance for the bond
    Bond Arithmetic

     Bond Price
    o N is time period / I/Y is the YTM rate in full amount % / PMT is the coupon
    payout / FV is the par value
     Bond Price Quote
    o US treasury price quote of 91:29 = 91 29/32 of value = 91.9062%
     Dirty vs Clean
    o Dirty Price = Clean price ( + Accrued interest)
     Yield to Maturity
    o YTC: Sub in call price to full price and new time period
     Current Yield
    o Current yield = Annual coupon / current bond price
     Yield Curve
    o Rising yield curve = short term interest rates will move UP
    o Declining yield curve = short term interest rates will move down
    o Humped Yield Curve = intermediate yield higher than short term, long term
    yield is below short term
    o Flat yield curve = stable the whole way

    Macaulay Duration:
     It measures the weighted average of the years that an investor must hold the
    security until the present value of the bond's cash flows equals the amount paid for
    the bond.
     PMT ON FINANCIAL CALCULATOR PUT IN THE ACTUAL AMOUNT AND NOT THE
    percentage rate
    YTM:
    The relationship between bond prices and YTM is summarised below:/
     If a bond is trading at a discount = The Coupon Rate < YTM of the bond
     If a bond is trading at a premium = The Coupon Rate > YTM of the bond
     If a bond is trading at par = The Coupon Rate = YTM of the bond

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