Fixed Income Basics (CFA Level I Suggested Reading
- Bonds are one of the two main asset categories in a typical client portfolio
- A bond is essentially an IOU in which the issuer is obliged to pay interest and principal on fixed dates to the holders of the bond
- Bonds are attractive for investors because they provide steady income (which has made the term fixed income securities synonymous with bonds
- In this module you will learn about the basic features of bonds, types of bonds, accrued interest, clean price, and repos
Bond Structures (CFA Level I Suggested Reading
- A callable bond gives its issuer the right to redeem the bond at a pre-specified price prior to its maturity date
- A putable bond gives its holder the right to sell it back to the issuer at a certain price
- Convertible bonds are hybrid securities that are issued as bonds but can be converted into common stocks of the issuing company
- The number of stocks that can be obtained per bond is called the "conversion ratio"
- A warrant is an option to purchase shares of the issuing company
- Mortgage-backed securities are bonds backed by a pool of residential mortgages
- Bullet bonds can be priced using the classical bond price equation
- Three common variations of the bullet bond are the zero coupon bond, the step-up bond and the amortising bond
- Bond stripping involves the dissociation of the coupons and principal repayment of a bond into separate securities that are traded independently of each other
- Bond reconstitution involves the creation of whole bonds from previously stripped components
- A floating-rate note is a security whose interest rate is not fixed at the time of issue but rather varies from one payment period to another
Fixed Income Return (CFA Level I Suggested Reading
- Calculation of return in fixed income markets
- Money market yields
- Zero coupon yields (or spot rates
- Gross redemption yield
- Total return
- How yield is quoted in the market
Fixed Income Risks (CFA Level I Suggested Reading
- Types of risks involved in fixed income investing
- Rise in interest rates
- Deterioration of the finances of the issuer
- Currency exchange rate movements
- Fall in liquidity
- Political events
- Measures of interest rate risk
Bond Valuation (CFA Level I Suggested Reading
- The value of money decays with time
- The future value of today's dollar can be calculated by compounding it over the period
- The present value of a future dollar can be calculated by discounting it over the period
- The sum of the discounted values of cash flows due to an investment is called the "net present value" (NPV
- IRR is the discount rate that makes the NPV of an investment equal to zero
- The price of a zero coupon bond is equal to the present value of this cash flow, discounted using the yield at which the bond is trading in the market
- An annuity is a stream of constant cash flows
- A coupon bond is effectively a combination of an annuity and a zero coupon bond
- Bonds trade in the market on the basis of their clean price, while the actual sale/purchase price of the bond is its dirty price
Bond Market Sectors (CFA Level I Suggested Reading
- The government bond market is one of the most important financial markets in the world
- Corporate bonds are bonds issued by companies to raise funds for capital investment
- Eurobonds are fixed income securities that are sold to investors outside the country in whose currency they are issued
- Several types of securities are issued in this market including fixed rate, floating rate, convertibles, etc
- Brady bonds were created by repackaging distressed Latin American debt
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