Bond Valuation Price Sensitity and Hedging

Bond Markets ? T bill price

? T note and T bond price Invoice Price = Flat Price + Accrued Interest

? Repo interest Interest = loan amount ? repo rate ? 1/360

? Repo gain/loss capital gain/loss on entire bond + carry

Bond Valuation ? Annual effective rate

AER = (1 + APR/m)m ? 1 ? Continuous compounding

m AER eAPR ? 1 ? General bond pricing formula

? General bond pricing formula with ann. APR

? Zero coupon bond price and yield

? Perpetuity price and yield

? Annuity price

? Coupon bond price

Term Structure of Interest Rates ? Brandt's preferred yield model

? Brandt's preferred discount function model Forward rates implied by spot rates

? Spot rates implied by forward rates

Price Sensitity and Hedging ? Dollar value of a basis point ? Duration ? Macaulay duration of zero coupon bond ? Macaulay duration of coupon bond ? 1st-order approximation of bond price change ? 1st-order approximation of DV01 ? Convexity ? Convexity of zero-coupon bond ? Convexity of coupon bond ? 1st-order approximation of duration change ? 2nd-order approximation of bond price change ? Duration of portfolio

? Duration neutral portfolio ? Volatility weighted duration neutral portfolio ? Regression-based duration neutral portfolio

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