Fixed Income Analysis - Summary - Tilburg university - MSc Finance
32 views 1 purchase
Module
323076-M-6 (323076M6)
Institution
Tilburg University (UVT)
Book
Fixed Income Securities
Instagram: ECOsummaries DM me for 20% discount!
Summary for the course 'Fixed Income Analysis'. This summary was written in order to study for the final. Everything you need to know is available in this summary.
Instagram: ECOsummaries DM me for 20% discount!
,Lecture 1 – Basics of fixed income analysis, duration and convexity
Discount factors:
Discount factor: Z(t,T)
→ Term of exchange between given amount at t vs. a certain amount at T.
Price of $100 zero-coupon bond: notation
→ Price = FV * discount factor
Z(t,T): can be seen as price at time t of a zero-coupon bonds with FV = 1, maturing at T
(=discount factor)
Interest rates and compounding frequencies:
- Interest rates are closely related to discount factors.
→ Interest rate depend on compounding frequency.
- Compounding frequency of interest: number of times a year interest is paid.
- Given interest rate: higher compounding frequency → higher payoff
- Given payoff: higher compounding frequency → lower interest rate
Compounding:
Annual compounding:
Payoff:
Discount factor:
Annual compounding rate:
Note: this formula is hardly ever used
More frequent compounding (n):
and
- n is the compounding frequency. If you earn 3% interest annually, you divide it by 2, since
you receive 1.5% semi-annually.
- Discount factors are always given, and interest rates are ways to express this discount
factor.
3
, Continuous compounding:
Continuous compounding: infinite compounding frequency
- Continuous compounding is used
as standard in this course.
- The higher the compounding
frequency, the lower the interest
rate.
- There is a limit to how far the
interest can drop (see table)
Interest on interest effect: interest rate needs to be slightly lower each time to get the same
price of the bond.
Term structure of interest rates:
Term structure / Spot curve / yield curve: defines the relation between interest rates and
their time to maturity (T-t).
Increasing: typical form, higher interest rate
for a longer maturity (upward sloping)
Decreasing: seen before recessions, short-
term is above long-term interest rate.
Hump: highest interest rates for mid-term
maturity, and then declining again
Inverted hump: very rare, lowest point for
mid-term maturity.
Example – Dutch term structure:
Blue: upward sloping
→ Typically seen when general level of
interest rates is low¸ hence mean
reverting.
Negative interest rates: occurs when
people are willing to face losing money
to ‘’secure’’ their money instead of
having a risk of losing it.
→ 0.5% is the probability that money
is lost/stolen/etc. So people still willing
to receive negative interest rates.
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ecosummaries. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £5.66. You're not tied to anything after your purchase.
