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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Extra info for An introduction to bond markets
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.