Bond Prices and Yields参考.ppt

CHAPTER 14 Bond Prices and Yields CHAPTER 15 The Term Structure of Interest Rates Forward Rates as Forward Contracts In general, forward rates will not equal the eventually realized short rate Still an important consideration when trying to make decisions : Locking in loan rates Figure 15.7 Engineering a Synthetic Forward Loan Credit Default Swaps A credit default swap (CDS) acts like an insurance policy on the default risk of a corporate bond or loan. CDS buyer pays annual premiums. CDS issuer agrees to buy the bond in a default or pay the difference between par and market values to the CDS buyer. Credit Default Swaps Institutional bondholders, e.g. banks, used CDS to enhance creditworthiness of their loan portfolios, to manufacture AAA debt. CDS can also be used to speculate that bond prices will fall. This means there can be more CDS outstanding than there are bonds to insure! Figure 14.12 Prices of Credit Default Swaps Credit Risk and Collateralized Debt Obligations (CDOs) Major mechanism to reallocate credit risk in the fixed-income markets Structured Investment Vehicle (SIV) often used to create the CDO Loans are pooled together and split into tranches with different levels of default risk. Mortgage-backed CDOs were an investment disaster in 2007 Figure 14.13 Collateralized Debt Obligations The yield curve is a graph that displays the relationship between yield and maturity. Information on expected future short term rates can be implied from the yield curve. Overview of Term Structure Figure 15.1 Treasury Yield Curves Bond Pricing Yields on different maturity bonds are not all equal. We need to consider each bond cash flow as a stand-alone zero-coupon bond. Bond stripping and bond reconstitution offer opportunities for arbitrage. The value of the bond should be the sum of the values of its parts. Table 15.1 Prices and Yields to Maturities on Zero-Coupon Bonds ($1,000 Face Value) Example 15.1 Valuing Coupon Bonds Value a 3 year, 10% coupon bond using di