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Math 499

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Michael Manser

on 7 May 2010

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Transcript of Math 499

Fixed Income Fixes! Michael Manser What is a bond??? Debt security Why do they exist? Who buys them? Why? How much might one pay for these? Uh... Example? General Electric Face Value Coupon Maturity Payments per year Price $1,000.00 5.45% 10 years 2 $959.09 Really Important Background Information Yield IRR Slightly Different IRR (that gives us bond yield) Duration Convexity What is duration? What does it measure? Why is it helpful? Formula Better Formula Examples Modified Duration Kind of like duration, only better! Formula Price Change Example Example Yield (%) Price ($) Bond A Bond B 98.37 162.76 5.00 300 Duration Immunization Why might an investor be tempted to immunize their bonds? Who are these investors? The Method (or madness...) of Immunization As long as we have 2+ bonds in our portfolio we can find a solution! Example Obligation Duration Matching The Better Method Convexity Matching Bonds Investing in single bond Price $100.00 Yield - 0% Coupon - 5% Coupon - 10% Coupon - 15% Coupon Price vs YTM Yield 6.00%
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