Fixed Income Assignment Solution Assignment #1 1.1. Compute the discount factors (d(t)) for the following selected U.S. Treasury Bond Prices as of May 28, 2010: Selected US Treasury Bond Prices as of May 28, 2010 Coupon (%) Maturity Price 2.250% 11/30/2010 100.050 5.875% 5/31/2011 104.013 5.500% 11/30/2011 105.356 5.750% 5/31/2012 107.366 4.375% 11/30/2012 105.269 4.500% 5/31/2013 106.160 3.000% 11/30/2013 100.952 3.250% 5/31/2014 101.236 3.125% 11/30/2014 100.134 Solution HWK1.1 Selected US Treasury Bond Prices as of May 28, 2010 Coupon (%) Maturity Price d(t) 2.00% 0.250% 2.250% 2010/11/30 100.050 0.98937 5.00% 0.875% 5.875% 2011/5/31 104.013 0.98221 5.00% 0.500% 5.500% 2011/11/30 105.356 0.97260 5.00% 0.750% 5.750% 2012/5/31 107.366 0.96138 4.00% 0.375% 4.375% 2012/11/30 105.269 0.94655 4.00% 0.500% 4.500% 2013/5/31 106.160 0.93147 3.00% 0.000% 3.000% 2013/11/30 100.952 0.90913 3.00% 0.250% 3.250% 2014/5/31 101.236 0.88915 3.00% 0.125% 3.125% 2014/11/30 100.134 0.86929
Definition of Fixed Income Analysis
A review system which is controlled to present concise details on fixed income or debt securities and the process of analysis on interest rate risk, credit risk, and the behavioral pattern hedging portfolios of fixed income. At the end of the evaluation, the analysis comes up with the answers, whether to buy or sell, hold or hedge or staying out of a particular security. The products of fixed income are generally, issues by various government treasuries, international companies in the form of bonds.
The process of valuation-
The movement of cash in fixed income takes place in the form of regular coupons several coupons payments over a period and when the bond matures with the time the repayment of the principle is entitled to the bond holder. The method of ‘Time value of money’ is applied to find the "Present Value" of each cash flow.
Books on Fixed Income Analysis
Fixed Income Analysis By Martin L. Leibowitz (published by John Wiley & Sons, 2007)
Fixed Income Modelling By Claus Munk (published by Oxford University Press, 2011)
How Fixed Income Analysis works?
With the given examples, Fixed Income Analysis can be defined clearly, here two example that can conspicuous you understanding about the idea of Fixed Income Analysis,
- Corporate bonds, certificates of deposit (CDs) and preferred stock, Treasury bond is the most-common fixed income securities are most commonly used as fixed income securities, the bond holders choose the option of interest. Let’s say there is investor who has proffered stock in ABC company, as the conditions follows, he will be provided, quarterly dividend payment of $5 per share for the lifetime of the bond.
- Suppose there is an investor, who owns a Treasury bond with a par value of $1,000 and an annual yield of 6%. As the conditions follows, the investor is guaranteed with the amount of $60 each year for the life of the bond.
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