fixed income. what is fixed income? when you hear fixed income what do you think about? a type of...
TRANSCRIPT
S
Fixed Income
What is fixed income?
When you hear fixed income what do you think about?
A type of investing or budgeting style for which real return rates or periodic income is received at regular intervals at reasonably predictable levels
Who uses fixed income?
Retail investors
Retirement accounts
Pensions
Types of Fixed Income
Annuities
Tax-Exempt Bonds
Taxable Bonds
MBSs, CDOs, CMOs, MSRs
Annuities
Sold by financial institutions
Accept and grow funds
Payment later
Accumulation phase
Annuitization phase
Structure
Principal + Accumulated Returns
Guaranteed
Index Based
Tax Benefits
Present Value
An individual wants to determine how much money she would need to put away to have $100 on year from today
What we need?
PV of Annuity Formula
0 A A A A A A A A F
i
Discounting to Present Time
FV of Annuity
Present Value of an Annuity
Use Future Value to get Present Value
Discount
Present Value of an Annuity
Substitute in the Future Value
Bonds
A debt investment in which an investor loans money to an entity which borrows the funds for a given period of time at a variable or fixed interest rate
Used to finance capital expenditure
Owners referred to as debtholders or creditors of the issue
Components of Bonds
Interest rate (Coupon)
Principal
Maturity Date
Issue Price
At par
Face Value
Intrinsic Value
Types of Bonds
Zero Coupon
Convertible
Callable
Non-Callable
Zero Coupon
No regular coupon payments
Issued at a discount to market
Market price converges to face value
Convertible
They are bonds with an embedded call option
Allows bondholders to convert debt into equity
Attractive conversion
Callable
Company can call back bonds from debt holders
Interest rate decrease
ReFi
Usually traded at a premium
Features of Bonds
Credit Quality
Yield
Pricing
Duration
Credit Quality
Each bond has a credit rating
Indicates likelihood of default
Moody’s, S&P, and Fitch
Ratings
Yield
Amount of return an investor will realize on a bond
Nominal Yield
Current Yield
Yield Curve
Treasury Yield Curve
Bond Pricing
Premium, Discount, or Par
Calculating max you want to pay
Fundamentally: the price of a bond is the sum of the present values of all coupon payments plus the present value of the par value at maturity
Pricing Formula (Basic)
Pricing Formula (Annuity Incorporation)
Duration
Measures price sensitivity to change in interest rates
Longer maturity = more sensitive
Expressed as a number of years
Rising interest rates = falling bond prices
Falling interest rates = rising bond prices
Duration Formula
Types of Bonds
Treasuries
TIPS
Municipalities
Sovereign
Corporate
Many More…..
Bond Market Size