Securities which obligate the borrower/issuer to make payments on a fixed schedule. Fixed income securities include sovereign, corporate and municipal bonds, corporate loans, and securitized lending (e.g., ABS). "Fixed" refers only to the schedule of obligatory payments, not the amount, and may ...
5
votes
1answer
210 views
How to value a floor when a loan is callable?
Certain bank loans pay a spread above a floating-rate interest rate (typically LIBOR) subject to a floor. I would like to find the value of this floor to the investor. Assume for this example that ...
5
votes
1answer
695 views
How would I value a perpetual bond with an embedded option?
I am trying to work out how to value the following transactions. It should be straight forward, since it breaks down into a series of well known instruments, yet I am not sure how to evaluate it:
...
7
votes
1answer
120 views
How to handle coupon payments when pricing a bond with an embedded option?
I'm using a binomial tree to price a bond that has an embedded call or put option.
On every node that has a coupon payment, do you include the coupon payment then max/min out the value, or do you ...
4
votes
1answer
676 views
What is the replicating portfolio of swaptions for a constant maturity swap (CMS)?
How do you replicate the payoff of a constant maturity swap rate?
That is, if the payoff of a contract pays the 5-year swap rate every year for 10 years, how would you replicate this payoff using ...
6
votes
2answers
218 views
Why is there a price difference between 30 year principal and interest STRIPS?
Sorry if this is obvious, I am not a professional. I like to trade 30 year treasury zero's.
I have noticed that the price for a 30 year principal payment is never the same as a 30 year interest ...
4
votes
0answers
356 views
Correct way to calculate bond's Yield-to-Horizon
I'm creating some .Net libraries for bond pricing and verifying its correctness with a bond pricing excel spreadsheet (Bond Pricing and Yield from Chrisholm Roth) but I believe it calculates the Yield ...
6
votes
1answer
1k views
How to estimate probability of default from bond prices?
How do you use bond prices/yields to infer probabilities of default? I would think of it as follows:
Create a relationship between default free (e.g., Germany) and defaultable (e.g., Greece) bond ...
6
votes
1answer
232 views
How to build the short end of a zero coupon curve for non-core Eurozone countries?
I am in the process of building zero coupon curves for some countries in the Eurozone.
I have the following data sets:
Euribor and EONIA
Swap rates
Bond price and yields
The bond prices (and thus ...
4
votes
3answers
625 views
Does the debt load affect the volatility of equity?
Does the debt load of a company have an impact on the stock price of a company and its volatility? Also, how does the market react to the announcement of a company issuing bonds?
6
votes
2answers
566 views
Can one use options on Treasury futures to hedge a portfolio?
Can one use options on Treasury bond futures to hedge a typical fixed income portfolio? If so, how can one estimate the duration for an option on a Treasury futures contract, and taking this a step ...
7
votes
1answer
841 views
What is the basis risk between cash and futures government bonds?
I am currently working in a team responsible for maintaining a simple risk application for our bond desk and I am interested in knowing how to provide some sort of basic basis risk metric.
Our desk ...
2
votes
1answer
99 views
How to reconstruct a discontinued economic time series such as the Fed's CP rate?
The old 3-Month Commercial Paper Rate (CP3M) on FRED was discontinued in 1997. I would like to reconstruct this series in a reasonable fashion, so I can use it to analyze more recent events.
I was ...
6
votes
2answers
511 views
Closed-form formula for approximate maximum duration of a bond?
In teaching myself about bonds, I am writing some software, one piece of which will calculate the maturity of a bond given the yield curve as a function and a requested duration. The tricky part is ...
5
votes
1answer
314 views
What are some simple algorithms for hedging vanilla bonds?
My team will soon be implementing an auto hedger for our bond trading desk which will be integrated tightly with our risk application and I am interested in researching how this may work.
Any advice ...
7
votes
2answers
472 views
Is duration additive? $C_{newDur}=A_{fundDur}w_{a} + B_{fundDur}w_{b}$?
Suppose quantified duration (like Macaulay duration with changing intervals) $Dur = \frac{\sum t_{i} PV_{i}}{\sum PV_{i}}$ and two funds having durations $D_{a}$ and $D_{b}$. You own them in the ...
7
votes
1answer
270 views
Modified Durations of Different Noncallable Bonds and function of Maturity
I'm hoping someone could help me understand this subject better.
Basically I am reading a book and it shows a table
...
5
votes
1answer
178 views
How do bond pricing formulae differ between the US, UK and the Euro zone?
Let's restrict the scope of the question a little bit: I'm interested to learn about major differences in pricing formulae for nominal government bonds. The pricing formulae for inflation-linked bonds ...
