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 incorporates a certain examine the analytical thoughts utilized in the industry by means of investors and fund managers. This new version will replace the part on swaps and possibility administration, replace all routines and examples, upload a brand new part on credits derivatives, upload a piece on based finance securities & upload a bit on buying and selling. Contents additionally comprise: Bond yield size, rate of interest possibility, the united kingdom gilt industry and company debt markets, chance administration, Off-balance sheet tools, together with swaps and innovations, and in a foreign country and rising markets.
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Additional info for An introduction to bond markets
50, an annual coupon of 3% and exactly 1 year before maturity. 50 each and a redemption payment of $100. 13) gives: 98:50 ¼ 1:50 103:50 þ 1 ð1 þ 2 rmÞ ð1 þ 12 rmÞ2 Note that the equation uses half of the YTM value rm because this is a semiannual paying bond. The expression above is a quadratic equation, which can be rearranged as: rm 98:50x2 À 1:50x À 103:50 ¼ 0; where x ¼ 1 þ 2 The equation may now be solved using the standard solution for equations of the form ax 2 þ bx þ c ¼ 0: pﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃﬃ Àb Æ b2 À 4ac x¼ 2a There are two solutions, only one of which gives a positive redemption yield.
Because different bonds can generate different and complicated cash-flow patterns, however, they are generally compared in terms of their yields. For example, market makers usually quote two-way prices at which they will buy or sell particular bonds, but it is the yield at which the bonds are trading that is important to the market maker’s customers. This is because a bond’s price does not tell buyers anything useful about what they are getting. Remember that in any market a number of bonds exist with different issuers, coupons and terms to maturity.
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. 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.