Fixed Income Securities Defining Element

Fixed income security

entity BOND
Collateral
8
Ey S Building
O O

I Issue poise I

Y
Coupon RV 1
Investor
Issues 989 FV bond holder
go

Trust deed or Bond

Indenture
covenants

IP 21000 FV 21000 Par

IP 1100 8 FV 121000 Premium

IP 950 8 FU CE1000 Discount Bond

FV 1000
8
original maturity syeers
coupon
I 2 3 4
Oy 5
I n r r p p
IP 950 80 80 80 80 80
1000
Country of Currency Issues Bond Type
Issue of bond from
India I Indian Domestic Bond

India E US Foreign Bond

Countries Currency Any Country Euro bonds

matinee

FIXED INCOME MARKET ISSUANCE

TRADING FUNDING
 REPO REVERSE REPO

10 days
ofay 1

É
IMP say 95

at Repurchase
Bank a pair RBI will happen
y here
90
Bank A RBI

I
repurchase
price
Repurchase Agreement
I will repurchase me securities
after 10 days 90412.1
interest REPOIRATE

a Haircut I 5.261
68 901g
Repo margin
or

5.261
j
SOVERIAN DEBT
ISSUIL [Link] FI BE D
 INTRODUCTION TO FIXED INCOME
VALUATION

FV 1000 Years
coupon 8 7th ng
1 2 3 4
Oy 5
I r r r p
Value Price 80 80 80 80 80
1000
of End piggic
FV
future CFs
924.18
YTM 1011
PV

compounding

PV Interest FV

discounting

PV FV Interest

g
YTM Value of Bond
108424
1000 porvalue

924.18

8.1 88 10.1 YTM R

 PAR DISCOUNT PREMIUM BONDS

FV 1000 n 5 coupon 8.1

YTM of Ñd when then

6 1084.24 Coupon 7 YTM Value FV Premium

8.1 1000 Coupon YTM Value FV Por
10 924.18 Coupon YTM Values FV Discount

CONVERGENCE OF BOND PRICE

prize
YTM 10 1
Premium
Bond Coupon 121

loopon 1011
Por value
Bond

Discount Coupon 8
Bond
Bond maturs here

195 here lifin years

Conclusion Price of bonds converge to its Pos value
as the bond approaches maturity
As the time passes
value of amountof
premium bond premium
Discount bond Discount
 SENSITIVITY OF Price TO UTM
FOR DIFF MATURITY

Bond A
f p Boy

EV 1000
Ci 8

toy
Bond B
I p n p

Yim 1 Sansi ti

lo g 12 1 change vity

Bond A 811 46 677 79 16.971 MORE

j Bond B 87711 773.99 11 761 LESS

Conclusion Longer maturity more sensitive

snorter maturity less sensitive

The bond A is less sensitive as compare to bond B because Bond A has a higher component of coupon in its value as compare to Bond B which has

lower component of coupon in its total value because of lower coupon rate. Since, coupon amounts are less sensitive as compare to redemption value

because of shorter life, therefore Bond A which has higher component of coupons (which we know are less sensitive), it will be less sensitive.
 SENSITIVITY OF Price TO UTM
FOR COUPON RATES

Bond A A p p joy
C 15
150 150 150
EV 1000 1000
n 10 Y

Bond B a p n jog
C 121 120 120
Foo

Yim to Sansiti

lo g 12 1 change vity

Bond A 1307.22 1169.5 10.53 LESS

É Bond B 1122.89 1000 10.94 MORE

conclusion Lower Coupon more sensitive

Higher coupon less sensitive

General conclusion

Coupons Value
more more

less less
Assuming anything else to
be the same
FLAT Pri CE FULL PRICE ACCRUED INTEREST

FV 8.1 Original maturity 4

1099m qupon Y
Tenor 2.54
15
O 1 2 3 4

I 1

950.26

996.64 Full Price

2
1 0.1

yo 1 7 Accrued Interest couponfor GMI

80 642

956.69 Flat price

 IOMPOUNDING FREQUENCY OF YTM

FV 1000 Semi annual

Freq
Coupon 101
PV 980
00 95 it 159 pay
980 50 to
10 0

YTM I 4 5.57 per period ie 6m

1216
11.14 annum
per

11.19
5 571 5.571

of of if by by 11
11 141
11 14.1
pa Comp semiannually pa comp annually
stated yield

calculating effective annual yield

means an equivalent annual 11.451
compouned ratel

a 1
01
72 11

0 1145 08 11 45
 SPOT V15 FORWARD Interest Rate

Term structure of Interestrate spot rates FEB rates

Yield curve Fwd Rates yield

in
I β
1414
5
P.a 1724

1434

2414
5.2
p.a 2427

3417
5 5
p.a

61
p.a

PRICE OF BOND
using spot rates
2 4
I I 1 β I

value
of
Bond
5

52

5 5
61

Values b
11.057 1 052 1.055 1.06
[Link] [Link] tsprud
 CALCULATING FWD RATES SPOT RATES
using

path

1417 5 40
5.1 p
p

pv It
FV
5 2 1

Pathz

logically FV Path 1 FV path 2

11 0.05 1 14147 0052

1717 5.401 Da

Calculate 24 14 6101 pa
24 24

11052711 24247 1 06

1 2424 1 1408

24 24 V1 1408 1
6.811 p.a
 BOND
PRICE OF using food rates

2 4
I I 1 I

value
of
Bond
5
some

51 1417
54

5
1414 Zyty
611
54

Value
Bond
of
11.057 11 054 1 05 1 061 11.054 1 05

1 3418 1 061 11.054 1 05

 CALLABLE VIS PUTABLE BONDS

when issues when bondholder has

has option to buy option to sell the
the bond bond before maturity
before maturity
Favourable to Issued Favourable to bondholder
ie ie
more
risky for lessing's for
investor

when does when Interest heh Intoles

Issues call rate falls Bondholds put gate rises

RISK Callable D optionfree puttable

Yield Callable optionfree putable
VALUE Callable optionfree putable

Va Vp
spread callable optionfree putable

spread spred
datoption option
risk
 YIELD to CALL YIELD TO WORST
First Call Second Call
Maturity
O 6 8 10

CMP 980 80 80 80
Call price or RV

Yield to
first call 8.711

Yield to
second call 8.45.1

Yield to
8 30 1
maturity

Yield to worst least of all 8.301

 FLOATERS QUOTED DISCOUNT MARGIN

FV

I i i i
Lt Amy
Lt Omi Lt Omi Lt Omi
RV
Value

Lt RMI

Coupon Rate Lt Omi am's Quoted margin

Required Rate Yim Lt Rmi Rmi required
margin
or discount
spread margin

NOTE Change in u will not

impact the price
Omi is
fixed initially doesn't change

Credit risk over Impact Impact

the time on margins on price

Remains Same RM 1 Omi No effect

Increase RM i 7 Omi Fall
Decrease RM't E Ami Rise
 MONEY MARKET INSTRUMENTS

IP Issue price
RV Redemption Value Holding PyY

Discount yield 36008365 100

annualized RVIII n simple
interest
Addonsiled
[Link] 360 08 365 100 eased
n

Bond Equivalant Add on

yield based
yield on 365 days

semi annual compounded add on Compound

Yield on semi annual
interest
Bond basis yield based on 365 days
based

d od
gpd food god 13651

90 100 go 100
i
08
3 5
P addon yield
days 45.06
p [Link] pa
compounded every
11.11 go days

od god 3050 ᵈ
I g [Link] I
go go
53.3

Effective
[Link]
11
0.11111
21 53.30 1

53.30p a M 47.63 p.a

compounded annually compounded semi annually
80 Yield on
semiannual
Bond basis
 FIXED INCOME RISK RETURN

1 2 3 4
Of 5
I r r r p p
Value Price 80 80 80 80 80
1000
of fond

future CFs
924.18
[Link] 1

assume bond sold

year 3
calculate return on bond

Coupon Reinvested 10.1 12 1 801 10.1 10.1

YTM years 10.1 10.1 10.1 12 1 81

Value of coupon 7.3 264.80 269.95 259.71 264.80 264.80

Value of bond 73 965.30 965.30 965.28 932 4 1000

Total value 43 1230.09 1735.2 1224.99 1197.2 1269.80

Inv 40 924.18 924.18 924.18 924.18 924.18

Realised Yield pa 10 1 10.15 9.84 9.01 11

in 3 year's holding period

Price risk Risk that price of the bond in the market may change
due to change in YTM interestrates

Reinvestment Risk Risk that reinvestment of coupons might not

happen planned rate say intial 4Th due to
change in YTM interest rates in the market
 MACAU LAYS MODIFIED EFFESTIVE DURATION
CONVEXITY EFFETTIVE CONVEXITY

CF
Periods In coupon Rv GIFs weights w

1
2

3
y

Value of 100
Bond

Macaulay Duration Weighted overage time taken to

recover the value bonds

he x we t
Maltz
xx Periods i.e years semiannual periods
As by 2 to get
no
of years
Modified Duration Tells you approx a in bond price
due to I't o in ITM

Pepita macuatysiodforation
I 4Th
K piquing

If macaulays duration is in semiannual periods modified

duration so calculated will also be semiannual
Henie annual modified duration Periodic MD
K

Approx I D in
f Annual X D Y TMG
bond prise my kin decimals
Approximate modified Duration V V
Z x Vox Ohm
V V
Effective Duration
Iused for option 2 x Vox O Beefiest
embedded bonds

Approximate Annual Convexity V t

Vt 2 Vo

Vo x 04Th

Approximate Effective Convexity V t

Vt 2 Vo
lused for option
embedded bonds Vo x OBELI KJ

Convexity Adjustment

bindFrise t Ahmad xD Yim

f x annual
convexity
A YTm2

Pri ie convexity
Adjustment
Prine as
per I
modified duration

Actual price
using
cash flow discounting

7Th
 PRICE RISK REINVESTMENT RISK

Invested Bond initial YTM After 6m of the

investment
in
YTM changes to
of lot

Reinvestment Price
Risk Risk Conclusion
Case 12 Gain Loss Inverse relation
Case 2 8 loss Gain 458 [Link]

IMPACT OF 20N ON TWO RISKS

Eyeingup

Reinvestment Risk

1 2 3 4
Of 5
I r r r p p
80 80 80 80 80
1000

Prine risk

Mac Durat of Bond

Point
whtre
Gain loss of
LESS
price risk will exactly
compensate loss gain of
reinvestment risk

If Duration Gop Duration Gop

Duration Inv Horizon Duration Inv Horizon
Then Reinvestment Risk Prile Risk Reinvestment Risk Priie Risk

Yield T

Yied
C's of credit Analysis
SECURITIZATION ASSET BACKED SECURITIES
Bank loan originator
liabilities Asset x̅
Equity CC loans Financial
Assets FA x̅
Debt Auto loans
Home loans
Deposits
5
59 Borrower
FA I

SPV SPE

CC loans Financial Assets FA

Auto loans
Home loans

E E E E E E

Investors
w u n u n u e u e
u u n u u e u e u

EE backed
ET mortgage security
Asset Backed
security
 A B 5 Covered CDO
Bonds

mortgage any other

backed CC ABS Solar ABS loan
security
Cmos
IPG475,9 Pg 478,4A gadfly

Residential
commercial
MBS MBS
RMBS CMBS

Agency Non Agency

RMBS RMBS
Backed by Backed non conforming
conforming by
residentialmortgage residential mortgage loans
loans

mortgage pass collateralized

through
securities
mortage
obligation

Sequential pay PAC support

CMO class IMO
structure structy
 CREDIT TIAN CHING

COVERED BONDS

Provisions related to default