Bond Market

Time Value of Money & Discounting

Debt security is claim on specific stream of income (fixed income)

Present value of $1 to be received in one year?

RisksMarketCreditLiquidityLegal

Discount Rate & Discount Factor

Day Count & Payment FrequencyConvention is to quote rate on annual

basisDay count basis

Money MarketBond Market

Actual/3030/360 Actual/Actual

Government Bond (Treasuries)Corporate BondMunicipalities

Short Term Interest RateT-BillLondon Inter Bank Offered Rate (LIBOR)SpotForward

ConventionArbitrage PricingLinear Interpolation

Long-term BondsMarket Risk and Bond PricesTreasury Convention

Issuance ProcessCorporate Bond

Issuance ProcessBond price and Yield

Yield to maturityYield to call

Duration & ConvexityMeasuring sensitivity to change in yield

Macaulay’s DurationModified Duration

Duration of portfolioWeighted Numerical

Convexity is second derivative

Duration & Price Sensitivity