An introduction to bond markets by Moorad Choudhry

By Moorad Choudhry

This e-book describes and defines bonds in the context of the capital markets and the differing kinds of bonds which are traded. It contains a distinct examine the analytical innovations utilized in the industry by means of investors and fund managers. This new version will replace the part on swaps and chance administration, replace all routines and examples, upload a brand new part on credits derivatives, upload a piece on dependent finance securities & upload a bit on buying and selling. Contents additionally comprise: Bond yield size, rate of interest threat, 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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Sometimes one will encounter bonds that pay interest on a quarterly basis. All bonds make periodic interest payments except for zero-coupon bonds. These bonds allow a holder to realise interest by being sold substantially below their principal value. The bonds are redeemed at par, with the interest amount then being the difference between the principal value and the price at which the bond was sold. We will explore zero-coupon bonds in greater detail later. Another type of bond makes floating-rate interest payments.

2). 4). 9): FV ð1:9Þ r mn 1þ m For example, the present value of $100 to be received at the end of 5 years, assuming an interest rate of 5%, with quarterly compounding is: PV ¼  PV ¼  100 ¼ $78:00  0:05 ð4Þð5Þ 1þ 4 Interest rates in the money markets are always quoted for standard maturities, such as overnight, ‘tom next’ (the overnight interest rate starting tomorrow, or ‘tomorrow to the next’), ‘spot next’ (the overnight rate starting 2 days forward), 1 week, 1 month, 2 months and so on, up to 1 year.

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.

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