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Chapter 12
T
Ct ParValue
PB = ∑ +
t =1 (1 + r ) t
(1 + r ) T
Maturity
Coupon Bid $ Yield %
Date
Rate Maturity Bid Asked Yield
Bell Canada 4.850 06/30/2014 106.56 2.25
6.13 3-12 101:31 102:00 ... Bell Canada 3.600 12/02/2015 103.71 2.62
4.88 5-12 102:13 102:14 0.04 Bell Canada 4.400 03/16/2018 106.45 3.26
4.38 3-13 105:14 105:15 0.26 Bank of Montreal 4.870 04/22/2015 107.88 2.45
• The above price is called invoice price (or dirty price, full price) which is the
actual price paid when buying the bond.
• Bond prices are quoted without the accrued interest. This is often referred to as
the clean price (or just price). To determine the clean price, we must compute
the accrued interest and subtract this from the dirty price. Conversely, if we know
clean price, we need to add accrued interest to determine the actual price we
need to pay.
What is the dirty price, accrued interest and clean price of the
bond on the settlement date?
PB = ∑ Ct t + ParValue
T
T
t =1 (1+ y ) (1+ y)
T
1,000
Discount bond
Time
0 Maturity date
Rating companies
Moody’s Investor Service
Standard & Poor’s
DBRS
Rating Categories
Investment grade
Speculative grade
Coverage ratios
Leverage ratio
Liquidity ratios
Profitability ratios
Cash flow to debt
Flat
Downward Sloping
Maturity
Part IV: Fixed Income Securities
-36-
Investment Management
Short Rate
0 1 2 ………… t-1 t
FT
P0 =
(1 + yT ) T
where, FT is the principal payment at time T and yT is the spot rate for
maturity T.
Part IV: Fixed Income Securities
-38-
Investment Management
Short Rate and Spot Rate
0 1 2 3 …….. t-1 t
r2,3 rt-1,t
r0,1 r1,2
reveal at time 2
reveal at time t-1
y1 reveal at time 1
Known at
time 0 y2
y3
yt …..
12 11.76
10
9.3
Annualized Spot 8
Rate 7.14
(%) 6
5.13 5.3
4
0
0.5 yr 1 yr 1.5 yr 2 yr 2.5 yr
Maturity
The spot rate curve for the spot rates in Example 12.2
f3,4 =?
12
10
8 Spot Rate
%
0
1 2 3 4 5
Year
Chapter 14
150%
100%
A
B
50%
C
D
0%
-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5%
-50%
-100%
years, but the cash flow 1st Yr 2nd Yr 3rd Yr 4th Yr 5th Yr
wt =
t
P r ice
Duration is shorter than maturity for all bonds except zero
coupon bonds
Duration is equal to maturity for zero coupon bonds
1 2 3 4 5 6 7 8 9 10
Duration=8.12
Modified Duration=8.12/(1+0.08)=7.52
P+∆P1’
P+∆P2
P+∆P2’
1 n
CFt
Convexity =
P × (1 + y) 2
∑ (1 + y) t ( t + t )
t =1
2