固定收益证券第一章(英文教学)

• The trader earns the accrued interest between t and T. • The repo rate for most Treasury securities is called the General Collateral Rate. • At times, a particular bond is hard to find. Rate on such a bond is called a special repo rate.
1.6 THE DERIVATIVES MARKET
• 1.6.1 Swaps • 1.6.2 Futures and Forwards • 1.6.3 Options
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1.6.1 Swaps
• Consider the following example:
1.4 The Repo Market – example
• At time t, a trader wants to take a long position until time T
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• Profit = PT – Pt – Repo rate x (Pt – haircut) • Capital at risk = haircut (very small)
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1.4 THE REPO MARKET
• A Repurchase Agreement (Repo) is an agreement to sell some securities to another party and buy them back at a fixed date and for a fixed amount. The price at which the security is bought back is greater than the selling price and the difference implies an interest called Repo Rate • A Reverse Repo is i the h opposite i transaction, i namely, l i it i is the purchase of the security for cash with the agreement to sell it back to the original owner at a predetermined price, determined, once again, by the Repo Rate
▫ An Arbitrage Opportunity is a feasible trading strategy involving two or more securities with either of the following characteristics:
It does not cost anything at initiation and it generates a sure positive profit by a certain date in the future It generates a positive profit at initiation, and it has a sure non-negative payoff by a certain date in the future
▫ Return = [PT – Pt – Repo rate x (Pt – haircut)] / haircut ▫ Very V highly hi hl levered l d position. iti
▫ D Dealers l often ft short h t on-the-run th T Treasuries i to t hedge h d other th securities. ▫ Purchased via reverse repo, causing repo rate to fall. (Lower repo rate is an additional benefit of owning the security, causing its price to rise).
Fixed Income Markets
(Dec. 2008)
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1.1.2 No Arbitrage and the Law of One Price
• The key concept for understanding the relationship among these different Fixed Income Markets is “No Arbitrage”.
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▫ The No Arbitrage condition requires that no arbitrage opportunities exist
1.2 THE GOVERNMENT DEBT MARKETS
Zero Coupon Bonds: securities that only pay the principal at maturity Fixed Rate Coupon Bonds: securities that pay a fixed coupon over a given period (semiannually) plus the principal at maturity Floating Rate Coupon Bonds: securities that have the coupon indexed to some other short term interest rate, varying over time The Municipal Debt Market p Trading g of Registered g Interest and Principal p of Separate Securities (STRIPS): Artificial zero coupon bonds constructed by stripping off separate interest and principal payments from a coupon bond Treasury Inflation Protected Securities (TIPS): securities with the principal indexed to inflation, so that coupon payments move accordingly
Chapter 1: AN INTRODUCTION TO FIXED INCOME MARKETS
1.1 INTRODUCTION
• 1.1.1 The Complexity of Fixed Income Markets • 1.1.2 No Arbitrage and the Law of One Price
• Asset Backed Securities (ABS) are similar to MBS, but instead they are collateralized by other types of loans (auto loans, credit cards, etc.)
▫ B By pooling li its i mortgages and d buying b i into i a mortgage backed b k d security, the bank reduces the effect of a local event affecting its balance sheet
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1.5 MORTGAGE BACKED SECURITIES AND ASSET-BACKED SECURITIES MARKETS
• The Mortgage Backed Securities (MBS) market has grown significantly over the past years
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1.1.1 The Complexity of Fixed Income Markets
• Debt markets have expanded, now relevant issuers include:
Treasury (Sovereign) Securities: Issued by governments (USA, Japan, UK, etc.); Agency Securities: Debt securities issued by government agencies, such as the Federal Home Loan Bank (FHLB), the Tennessee Valley Authority (TVA), the Federal National Mortgage Association (FNMA) and Government National Mortgage Association (GNMA). Corporate Securities: Debt securities issued by corporations (both investment grade and noninvestment grade) Mortgage-Backed Securities: Debt securities backed by pools of mortgages. Asset-Backed Securities: Securities backed by a portfolio of assets, such as credit card receivables. Municipal issues: Debt securities issued by state governments and municipalities.
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1.3 THE MONEY MARKET
The Money Market refers to the market for short term borrowing and lending, usually undertaken by banks. •Federal Funds Rate: rate for borrowing / lending balances kept at the Federal Reserve •Eurodollar Rate: rate of interest of dollar deposits at banks outside the US •LIBOR: average interest rate the banks charge to each other for short term uncollateralized borrowing / lending •Repo Rate: interest rate charged for short term borrowing / lending with collateral
▫ These securities allow local banks, which issue mortgages to individuals, to diversify their risk
A bank issues mortgages to individuals living nearby These mortgages are susceptible to local events (e.g. a local company goes bankrupt leaving many mortgage holders without a job)