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All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
All About Fixed Income Instruments
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All About Fixed Income Instruments

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Guyzz, I hope this helps you in some way...

Guyzz, I hope this helps you in some way...

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  • 1. Understanding Fixed Income Instruments
  • 2. <ul><li>Welcome To The World Of Risk Free rather Lower Risk and moderate returns </li></ul><ul><li>You are safe but no assurance on that safety </li></ul><ul><li>Quite a pickle – Isn’t It? </li></ul><ul><li>We see why????? </li></ul>Understanding Fixed Income Instruments
  • 3. Conventions <ul><li>Debt securities – Issued by borrowers to obtain liquidity or capital for their short term or long term needs </li></ul><ul><li>Promised payment events – Interest payment & Repayment of fixed amount </li></ul><ul><li>Secured & Unsecured </li></ul><ul><li>Risk prone – Not absolute risk free </li></ul><ul><li>Mid 2009 Debt market valued at $30 Trillion </li></ul>Understanding Fixed Income Instruments
  • 4. Types Of Bonds Understanding Fixed Income Instruments
  • 5. Features Of Bonds <ul><li>Coupon Rate </li></ul><ul><ul><li>“ 6s of 12/10/2009” – 6% Coupon maturing @... </li></ul></ul><ul><ul><li>Monthly (MBS & ABS), Semi-Annually </li></ul></ul><ul><ul><li>Zero-Coupon Bonds </li></ul></ul><ul><ul><li>Accrual Securities </li></ul></ul><ul><ul><li>Deferred Coupon Bonds </li></ul></ul><ul><ul><li>Floating Rate Securities </li></ul></ul><ul><ul><ul><li>Reference Rate + Quoted Margin </li></ul></ul></ul><ul><ul><ul><li>1-month LIBOR+100 basis points </li></ul></ul></ul>Understanding Fixed Income Instruments
  • 6. Accrual Securities Buyer Seller Jan 09 Jan 10 Jun 10 Jan 11 Jun 11 Jun 09 $ 5 $ 5 $ 5 $ 5 $ 5 Accrued Interest Par Value of $100 - Semi Annual Interest Of 5% Dirty Price – Trading Cum-Coupon Clean Price – Trading Ex-Coupon Understanding Fixed Income Instruments
  • 7. Calculating Accrued Interest <ul><li>Three pieces info needed: </li></ul><ul><ul><li>No of days in the accrued interest period </li></ul></ul><ul><ul><li>No Of days in the coupon period </li></ul></ul><ul><ul><li>Dollar amount of the coupon payment </li></ul></ul><ul><li>AI is calculated as </li></ul><ul><li>Day count conventions </li></ul>Understanding Fixed Income Instruments
  • 8. Features Of Bonds – Contd’ <ul><li>Maturity Date </li></ul><ul><ul><li>Time period over receipt of interest payments </li></ul></ul><ul><ul><li>Yield on a Bond </li></ul></ul><ul><ul><li>Price Of the Bond </li></ul></ul><ul><li>Price Of the Bond is calculated as </li></ul><ul><li>Sum Of the Present values of all expected coupon payments & Principal @ Par </li></ul>C = coupon payment n = number of payments i = interest rate, or required yield M = value at maturity, or par value  Understanding Fixed Income Instruments
  • 9. Features Of Bonds – Contd’ <ul><li>Yield – returns which investor gets by holding the bond till maturity </li></ul><ul><li>Current Yield Vs Adjusted Current Yield </li></ul><ul><li>A bond with a par value of $100 for $95.92 and it paid a coupon rate of 5% </li></ul>Understanding Fixed Income Instruments
  • 10. Price Vs Yield <ul><li>Price of a Bond & Yield of a Bond are inversely related </li></ul><ul><ul><li>When the Coupon rate is less than the required Yield, the price is less than the par value </li></ul></ul><ul><ul><li>When price is greater than the par value, the coupon rate is greater than the required yield </li></ul></ul><ul><li>YTM - The discount rate that equates a bond’s price with the present value of its future cash flows. </li></ul>Understanding Fixed Income Instruments
  • 11. Risk Associated With Bonds <ul><li>Interest Rate Risk </li></ul><ul><ul><li>Price Of a bond falls when interest rates rise </li></ul></ul><ul><ul><li>Floating Rate Securities </li></ul></ul><ul><li>Credit Risk </li></ul><ul><ul><li>Default, Downgrade </li></ul></ul><ul><li>Contractual Risk </li></ul><ul><ul><li>Callable Bonds </li></ul></ul><ul><li>Inflation Risk </li></ul><ul><ul><li>Increase in inflation – Purchasing power </li></ul></ul>Understanding Fixed Income Instruments
  • 12. Types Of Bonds <ul><li>Callable Bonds - A bond that can be redeemed by the issuer prior to its maturity. </li></ul><ul><ul><li>main cause of a call is a decline in interest rates </li></ul></ul><ul><li>Convertible Bonds – A bond that can be converted into a predetermined amount of the company's equity at certain times during its life </li></ul><ul><li>Eurodollar Bonds - U.S.-dollar denominated bond issued by an overseas company and held in a foreign institution outside both the U.S. and the issuer's home nation </li></ul><ul><ul><li>Chinese bank held dollar-denominated bonds issued by a Japanese company, this would be considered a eurodollar bond. </li></ul></ul>Understanding Fixed Income Instruments
  • 13. Types Of Bonds <ul><li>Eurobond is an international bond that is denominated in a currency not native to the country where it is issued </li></ul><ul><li>Yankee Bond - A bond denominated in U.S. dollars that is publicly issued in the U.S. by foreign banks and corporations </li></ul><ul><li>Bulldog Bond - A sterling denominated bond that is issued in London by a company that is not British </li></ul>Understanding Fixed Income Instruments
  • 14. Types Of Bonds <ul><li>Maple Bond - A bond denominated in Canadian dollars that is sold in Canada by foreign financial institutions </li></ul><ul><li>  Matilda/Kangaroo Bond - An bond denominated in the Australian dollar and issued on the Australian market by a foreign entity </li></ul><ul><li>Samurai Bond - Yen-denominated bond issued in Tokyo by a non-Japanese company </li></ul>Understanding Fixed Income Instruments
  • 15. Fixed Income Products <ul><li>Treasury Bills – Maturities with 6,12 & 18 months duration </li></ul><ul><ul><li>Issued by the Treasury of the state </li></ul></ul><ul><ul><li>Always issued at discount </li></ul></ul><ul><li>Government Bonds - Medium & long term bonds – known as bonos & obligaciones </li></ul><ul><ul><li>Maturities of 10, 15 & 30 Years </li></ul></ul><ul><ul><li>Fixed Interest rate through annual coupons </li></ul></ul>Understanding Fixed Income Instruments
  • 16. Fixed Income Products <ul><li>Commercial Paper - An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. </li></ul><ul><ul><li>Maturities on commercial paper rarely range any longer than 270 days </li></ul></ul><ul><li>Certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions </li></ul><ul><ul><li>Held until maturity </li></ul></ul>Understanding Fixed Income Instruments
  • 17. Fixed Income Products <ul><li>Repo – Repurchase Agreements (Not necessarily FI product) </li></ul><ul><li>Is a contract in which a security is sold with an agreement to repurchase the security at a higher price </li></ul>Understanding Fixed Income Instruments
  • 18. Fixed Income Products <ul><li>Reverse Repo is a contract in which a security is borrowed with an agreement to replace the security at a higher price </li></ul><ul><li>Secured lending and borrowing </li></ul>Repo Understanding Fixed Income Instruments
  • 19. Fixed Income Products <ul><li>Commercial Paper – Zero Coupon bonds issued at discount </li></ul><ul><ul><li>Short term with maturities 1,3,6,12 & 18 months </li></ul></ul><ul><ul><li>Placed in the primary market through competitive auctions </li></ul></ul><ul><li>Convertible/Exchangeable Bonds </li></ul><ul><ul><li>Enables a financial asset to be transformed into other </li></ul></ul>Understanding Fixed Income Instruments
  • 20. Fixed Income Derivatives Understanding Fixed Income Instruments
  • 21. MBS <ul><li>A mortgage-backed security ( MBS ) is an asset-backed security or debt obligation that represents a claim on the cash flows from mortgage loans, most commonly on residential property. </li></ul><ul><ul><li>Residential mortgage-backed security (RMBS) </li></ul></ul><ul><ul><li>Commercial mortgage-backed security </li></ul></ul><ul><ul><li>Collateralized mortgage obligation </li></ul></ul><ul><ul><li>Stripped mortgage-backed securities </li></ul></ul><ul><ul><li>Interest-only stripped mortgage-backed securities </li></ul></ul><ul><ul><li>Principal-only stripped mortgage-backed securities </li></ul></ul>Understanding Fixed Income Instruments
  • 22. Weapons Of Financial Destruction <ul><li>Collateralized Debt Obligation </li></ul><ul><li>Process Of Securitization </li></ul>Understanding Fixed Income Instruments
  • 23. Interest Rate Swap <ul><li>Interest rate swap is a derivative in which one party exchanges a stream of interest payments for another party's stream of cash flows </li></ul><ul><li>Fixed for floating/Vanilla Interest Rate Swaps </li></ul><ul><li>Often use LIBOR as reference rates </li></ul><ul><li>Hedging/Speculation on interest & FX rates </li></ul>Understanding Fixed Income Instruments
  • 24. Interest Swaps – I llustrated Understanding Fixed Income Instruments Time 6-Month Fixed Rate Floating Rate Swap 0 2.80% – 100.0 – 100.0 0 0.5 3.40% 2.3 1.4 0.9 1 4.40% 2.3 1.7 0.6 1.5 4.20% 2.3 2.2 0.1 2 5.00% 2.3 2.1 0.2 2.5 5.60% 2.3 2.5 – 0.2 3 5.20% 2.3 2.8 – 0.5 3.5 4.40% 2.3 2.6 – 0.3 4 3.80% 102.3 102.2 0.1 Cash Flows During the Life of a Hypothetical USD 100MM 4.6% Four-Year Swap
  • 25. Interest Rate Caps <ul><li>An interest-rate cap is an OTC derivative in which the buyer receives payments at the end of each period in which the interest rate (reference rate/LIBOR) exceeds the agreed strike rate (Cap rate) </li></ul><ul><li>3-year, USD 200MM notional cap </li></ul><ul><li>6-month Libor - index rate, struck at 7.5%. </li></ul><ul><li>Protects from int. rate rises </li></ul>Understanding Fixed Income Instruments
  • 26. Interest Rate Floors <ul><li>An interest rate floor is a derivative in which the buyer of the floor receives money if on the maturity the reference rate fixed is below the agreed strike price of the floor </li></ul><ul><li>Protects holder from declines in short-term interest </li></ul><ul><li>3-year, USD 200MM notional cap </li></ul><ul><li>6-month Libor - index rate, struck at 7.5%. </li></ul>Understanding Fixed Income Instruments
  • 27. Swaption <ul><li>A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap </li></ul><ul><li>the term &quot;swaption&quot; typically refers to options on interest rate swaps </li></ul><ul><ul><li>A payer swaption gives the owner of the swaption the right to enter into a swap where they pay the fixed leg and receive the floating leg. </li></ul></ul><ul><ul><li>A receiver swaption gives the owner of the swaption the right to enter into a swap where they will receive the fixed leg, and pay the floating leg. </li></ul></ul>Understanding Fixed Income Instruments
  • 28. Swaption <ul><li>designed to give the holder the benefit of the agreed-upon strike rate if the market rates are higher </li></ul><ul><ul><li>American swaption, in which the owner is allowed to enter the swap on any day that falls within a range of two dates. </li></ul></ul><ul><ul><li>European swaption, in which the owner is allowed to enter the swap only on the maturity date. </li></ul></ul><ul><ul><li>Bermudan swaption, in which the owner is allowed to enter the swap only on certain dates that fall within a range of the start (roll) date and end date. </li></ul></ul>Understanding Fixed Income Instruments

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