Bond Math: The Theory behind the Formulas by Donald J. Smith

By Donald J. Smith

A consultant to the idea in the back of bond math formulas

Bond Math explores the guidelines and assumptions at the back of regular data on danger and go back for person bonds and on fastened source of revenue portfolios. yet this publication is far greater than a chain of formulation and calculations; the emphasis is on tips on how to take into consideration and use bond math.

writer Donald J. Smith, a professor at Boston collage and an skilled govt coach, covers intimately funds industry premiums, periodicity conversions, bond yields to adulthood and horizon yields, the implied chance of default, after-tax premiums of go back, implied ahead and notice premiums, and length and convexity. those calculations are used on conventional fixed-rate and zero-coupon bonds, in addition to floating-rate notes, inflation-indexed securities, and rate of interest swaps.

  • Puts bond math in standpoint via discussions of bond portfolios and funding strategies.Content:
    Chapter 1 funds industry rates of interest (pages 1–22):
    Chapter 2 Zero?Coupon Bonds (pages 23–38):
    Chapter three costs and Yields on Coupon Bonds (pages 39–63):
    Chapter four Bond Taxation (pages 65–82):
    Chapter five Yield Curves (pages 83–106):
    Chapter 6 length and Convexity (pages 107–135):
    Chapter 7 Floaters and Linkers (pages 137–162):
    Chapter eight rate of interest Swaps (pages 163–184):
    Chapter nine Bond Portfolios (pages 185–207):
    Chapter 10 Bond options (pages 209–229):

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Suppose that some time in the not-so-distant future the fastest-growing financial institution in the world is Bank 24/7/52. Its success owes to pioneering use of hourly interest rates for loans and deposits. 2. The APR quoted by Bank 24/7/52 assumes a 364-day year. 0004% ∗ 24 ∗ 7 ∗ 52. To see how hourly interest rates might work, suppose a corporation makes a 52-hour, $5,000,000 time deposit at Bank 24/7/52. 3. The corporation will receive $5,001,560 when the deposit matures. 052416 ∗ 52 24 ∗ 364 = $5,001,560 The fraction of the year no longer is the number of days divided by the assumed number of days in the year; it becomes the number of hours for the transaction divided by the assumed number of hours in the year.

S. Treasury responded to the success (and profitability) of TIGRS, CATS, and LIONS with some clever financial engineering of its own—the STRIPS program. After 1983, Treasury securities were no longer issued in bearer form and were registered by a CUSIP (the acronym for Committee on Uniform Security Identification Procedures). Each Treasury bill, note, and bond has its own CUSIP. The innovation was to assign a CUSIP to each coupon and principal cash flow in addition to the overall security. For example, an 8%, 10-year Treasury note effectively became a portfolio of 20 separately registered coupon interest securities each with a face value of 4 (per 100 of par value) and one principal security for a face value of 100.

S. Treasury STRIPS, the acronym for Separate Trading in Registered Interest and Principal Securities. Why and how the Treasury first created STRIPS back in the 1980s is a great illustration of the process of financial engineering. Before getting to the STRIPS story, first consider a 10-year zero-coupon corporate bond that is priced at 60 (percent of par value). The investor pays $600 now and gets $1,000 in 10 years—simple enough. ) for this bond. ” tag, commonly used in bond markets, means that the yield is stated on a semiannual bond basis and has a periodicity of 2.

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