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Fixed Income 3

Fixed Income 3. Yield Measures, Spot rates, and Forward Rates Term Structure and Volatility of Interest Rates. Yield Measurement. Yield Measurement. Yield Measurement. Yield Measurement. Yield Measurement.

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Fixed Income 3

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  1. Fixed Income 3

  2. Yield Measures, Spot rates, • and Forward Rates • Term Structure and • Volatility of Interest Rates

  3. Yield Measurement

  4. Yield Measurement

  5. Yield Measurement

  6. Yield Measurement

  7. Yield Measurement Consider an annual pay 20 year, $1,000 par value, with 6% coupon rate and a full price of $802.07. Calculate the annual pay YTM. Answer : The relation between price and annual pay YTM on this bond is : 802.07 = S20t=1. 60 . + . 1,000 .  YTM = 8.019 % (1 + YTM)t (1 + YTM)20 Here we have separated the coupon cash flows and the principal repayment. The calculator solution is : PV = -802.07 FV = 1,000 N = 20 PMT = 60 CPT  1/Y = 8.019, 8.019% is the annual pay YTM.

  8. Yield Measurement A 5 year Treasury strip is priced at $768. Calculate the semiannual pay YTM and annual pay YTM. Answer : The direct calculation method, based on the geometric mean covered in Quantitative method is : semiannual pay YTM or BEY =((1,000)1/10 – 1) x 2 = 5.35% 768 annual pay YTM or BEY =((1,000)1/5 – 1) x 2 = 5.42% 768 Using the TVM calculator function : PV = -768, FV = 1,000, N = 10, PMT = 0, CPT  1/Y = 2.675% x 2=5.35% for the semiannual pay YTM PV = -768, FV = 1,000, N = 5, PMT = 0, CPT  1/Y = 5.42% for the annual pay YTM The annual pay YTM of 5.42% means that $768 earning compound interest of 5.42% / year would grow to $1,000 in 5 years.

  9. Yield Measurement

  10. Yield Measurement

  11. Yield Measurement

  12. Yield Measurement

  13. Yield Measurement

  14. Yield Measurement

  15. Bootstrapping

  16. Bootstrapping Calculate the value of a 1.5 yr, 8% Treasury bond given the spot :0.5 years = 4% , 1 years = 5% , 1.5 years = 6% N1 N=1; FV=4; PMT=0; I/Y=2% Comp PV =-3.92 N2 N=2; FV=4; PMT=0; I/Y=2.5% Comp PV =-3.81 N3 N=3; FV=104; PMT=0; I/Y=3% Comp PV =-95.17 TOTAL = 3.92 + 3.81 + 95.17 = 102.9

  17. Yield Spread Measurement

  18. Yield Spread Measurement

  19. Yield Spread Measurement

  20. Yield Spread Measurement

  21. Forward and Spot Rate

  22. Forward and Spot Rate

  23. Forward and Spot Rate Investors are willing to accept 4.0% on the 1-year bond today (when they could get 8.167% on the 2-year bond today) only because they expect to receive 12.501% on a 1-year bond 1 year from today. The expected rate is the forward rate. Forward rates can be computed given the Spot rates and vice versa. (1 + Z2)2 = (1+1f0) x (1+1f1) Z2 = [(1.04) (1.12501)]1/2 – 1 = 8.167%

  24. Forward and Spot Rate

  25. Term Structure and Volatility of Interest Rates

  26. Treasury Yield Curve

  27. Treasury Yield Curve

  28. Treasury Yield Curve

  29. Constructing Treasury Yield Curve

  30. Constructing Treasury Yield Curve

  31. Constructing Treasury Yield Curve

  32. Constructing Treasury Yield Curve

  33. Constructing Treasury Yield Curve

  34. Theories of Term Structure

  35. Theories of Term Structure

  36. Theories of Term Structure

  37. Theories of Term Structure

  38. Theories of Term Structure

  39. Theories of Term Structure

  40. Key rate Duration

  41. Key rate Duration

  42. Key rate Duration

  43. Key rate Duration

  44. Yield Volatility Measurement

  45. Yield Volatility Measurement

  46. Forecasting Yield Volatility

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