An introduction to bond markets by Moorad Choudhry

By Moorad Choudhry

This e-book describes and defines bonds in the context of the capital markets and the different sorts of bonds which are traded. It contains a special examine the analytical recommendations utilized in the marketplace by way of investors and fund managers. This re-creation will replace the part on swaps and chance administration, replace all routines 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 contain: Bond yield dimension, rate of interest danger, the united kingdom gilt industry and company debt markets, chance administration, Off-balance sheet tools, together with swaps and strategies, and out of the country and rising markets.

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The cash flows they represent are the interest payments on the loan and the loan redemption. Unlike commercial bank loans, however, bonds are tradeable in a secondary market. Bonds are commonly referred to as fixed-income instruments. This term goes back to a time when bonds paid fixed coupons each year. That is no longer necessarily the case. Assetbacked bonds, for instance, are issued in a number of tranches – related securities from the same issuer – each of which pays a different fixed or floating coupon.

P¼ C¼ r¼ N¼ Bonds in the US domestic market – as opposed to international securities denominated in US dollars, such as USD Eurobonds – usually pay semiannual coupons. 12) allowing for INTRODUCTION TO BONDS 19 twice-yearly discounting: P¼ C=2 C=2 C=2 C=2 M þ þ þ ÁÁÁ þ þ ð1 þ 12 rÞ ð1 þ 12 rÞ2 ð1 þ 12 rÞ3 ð1 þ 12 rÞ2N ð1 þ 12 rÞ2N 2N X C=2 M þ 1 n ð1 þ 2rÞ ð1 þ 12rÞ2N n¼1 " # C 1 M 1À ¼ þ 2N 1 r ð1 þ rÞ ð1 þ 1rÞ2N ¼ 2 ð1:13Þ 2 Note that 2N is now the power to which the discount factor is raised.

All the factors that identify the bond – including the nature of the issuer, the maturity date, the coupon and the currency in which it was issued – influence the bond’s discount rate. 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.

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