Fixed Income Markets and Management

Basics of Fixed Income Securities
COMM 474

Outline

1

Discount Factors

2

Interest Rates

3

The Term Structure of Interest Rates

4

Coupon Bonds

5

Quoting Conventions

6

Floating Rate Bonds

COMM 474

Basics of Fixed Income Securities

1 / 35

Outline

1

Discount Factors

2

Interest Rates

3

The Term Structure of Interest Rates

4

Coupon Bonds

5

Quoting Conventions

6

Floating Rate Bonds

COMM 474

Basics of Fixed Income Securities

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Discount Factors
The discount factor between two dates, t and T :
Z (t, T ) give the current (time t) value (price) of receiving $1 at some point in the future (time T ).
Example:
On t = August 10, 2006 the Treasury issued 182-day (maturity T2 =
February 8, 2007) Treasury bills.
The issuance market price was $97.477 for $100 of face value
Q: What is the discount factor?

COMM 474

Basics of Fixed Income Securities

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Discount Factors
The discount factor between two dates, t and T :
Z (t, T ) give the current (time t) value (price) of receiving $1 at some point in the future (time T ).
Example:
On t = August 10, 2006 the Treasury issued 182-day (maturity T2 =
February 8, 2007) Treasury bills.
The issuance market price was $97.477 for $100 of face value
Q: What is the discount factor?

COMM 474

Basics of Fixed Income Securities

2 / 35

Discount Factors
The discount factor between two dates, t and T :
Z (t, T ) give the current (time t) value (price) of receiving $1 at some point in the future (time T ).
Example:
On t = August 10, 2006 the Treasury issued 182-day (maturity T2 =
February 8, 2007) Treasury bills.
The issuance market price was $97.477 for $100 of face value
Q: What is the discount factor?

COMM 474

Basics of Fixed Income Securities

2 / 35

Discount Factors
The discount factor between two dates, t and T :
Z (t, T ) give the current (time t) value (price) of receiving $1 at some point in the future (time T ).
Example:
On t = August 10, 2006 the Treasury issued 182-day (maturity T2 =
February 8, 2007) Treasury bills.
The issuance market price was $97.477 for $100 of face value
Q: What is the discount factor?

COMM 474

Basics of Fixed Income Securities

2 / 35

Discount Factors
The discount factor between two dates, t and T :
Z (t, T ) give the current (time t) value (price) of receiving $1 at some point in the future (time T ).
Example:
On t = August 10, 2006 the Treasury issued 182-day (maturity T2 =
February 8, 2007) Treasury bills.
The issuance market price was $97.477 for $100 of face value
Q: What is the discount factor?

COMM 474

Basics of Fixed Income Securities

2 / 35

Discount Factors across Maturities
Z (t, T ) records the time value of money between t and T
Property:
T1 < T2 ⇒ Z (t, T1 ) ≥ Z (t, T2 )
Example:
On t =August 10, 2006 the U.S. government also issued 91-day bills with a maturity date of T1 =November 9, 2006.
The price was $98.739 for $100 of face value
Discount factor:
Z (t, T1 ) =

COMM 474

98.739
= 0.98739 > 0.97477 = Z (t, T2 )
100

Basics of Fixed Income Securities

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Discount Factors across Maturities
Z (t, T ) records the time value of money between t and T
Property:
T1 < T2 ⇒ Z (t, T1 ) ≥ Z (t, T2 )
Example:
On t =August 10, 2006 the U.S. government also issued 91-day bills with a maturity date of T1 =November 9, 2006.
The price was $98.739 for $100 of face value
Discount factor:
Z (t, T1 ) =

COMM 474

98.739
= 0.98739 > 0.97477 = Z (t, T2 )
100

Basics of Fixed Income Securities

3 / 35

Discount Factors across Maturities
Z (t, T ) records the time value of money between t and T
Property:
T1 < T2 ⇒ Z (t, T1 ) ≥ Z (t, T2 )
Example:
On t =August 10, 2006 the U.S. government also issued 91-day bills with a maturity date of T1 =November 9, 2006.
The price was $98.739 for