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Apr 1, 2003 · PDF | This paper examines the relationship between the development of the aggregate bond markets and real GDP in 13 highly developed economies.
Valuation of Bonds and Stocks. Learning Objectives. After studying this chapter you should be able to: Distinguish between various valuation concepts. Estimate the value of a bond. Calculate various measures of bond yield. Read bond and stock quotations. Value a preference stock.
Jan 1, 2006 · A bond is a debt capital market instrument issued by a borrower, who is then required to repay to the lender/investor the amount borrowed plus interest, over a specified period of time. Bonds...
- Moorad Choudhry
- 1.2.4 Spot Rates
- 1.2.5 Forward Rates
- S→T = − log P(t, T ) ∂T = − P(t, T )
- 1.2.6 Risk-Free Rates of Interest and the Short Rate
- = = T t =
- Liscalledthetimelagandistypicallyabouttwomonthsinmostcountries(including
- 1.6 General Theories of Interest Rates
- = E [R(T, S) ].
- 1.6.2 Liquidity Preference Theory
- 1.6.3 Market Segmentation Theory
The spot rate at time t for maturity at time T is defined as the yield to maturity of the T -bond: log P(t, T ) R(t, T )
The forward rate at time t (continuously compounding) which applies between times and S (t T < S) is defined as
T ⇒ P(t, T ) = exp − f (t, u) du . t In other words, we can make a contract at time t to earn a rate of interest of (t, T ) per time unit between times T and T dt (where dt is very small). This is, of course, a rather artificial concept. However, it is introduced for convenience as bond-price modelling is carried out much more easily with the insta...
R(t, T ) can be regarded as a risk-free rate of interest over the fixed period from t to T . When we talk about the risk-free rate of interest we mean the instantaneous risk-free rate: r(t) lim R(t, T ) R(t, t) f (t, t).
→ The easiest way to think of r(t) is to regard it as the rate of interest on a bank account: this can be changed on a daily basis by the bank with no control on the part of the investor or bank account holder. r(t) is sometimes referred to as the short rate.
the USA), but sometimes eight months (in the UK for example).3 The time lag of two months ensures that the relevant index value is known by the time a payment is due. The time lag of eight months ensures that the absolute amount of the next coupon payment is known immediately after the time of payment of the immediately preceding coupon. This makes...
In this section we will introduce four theories which attempt to explain the term structure of interest rates. The first three are based upon general economic reasoning, each containing useful ideas. The fourth theory, arbitrage-free pricing, introduces us to the approach that we will take in the rest of this book.
This version of the theory does allow for correlation between R(T, U) and R(U, S), for any T < U < S. The problem with this theory, on its own, is that the forward-rate curve is, more often than not, upward sloping. If the theory was true, then the curve would spend just as much time sloping downwards. However, we might conjecture that, for some re...
The background to this theory is that investors usually prefer short-term investments to long-term investments—they do not like to tie their capital up for too long. In particular, a small investor may incur a penalty on early redemption of a longer-term investment. In practice, bigger investors drive market prices. Furthermore, there is a very liq...
Each investor has in mind an appropriate set of bonds and maturity dates that are suitable for their purpose. For example, life insurance companies require long-term bonds to match their long-term liabilities. In contrast, banks are likely to prefer short-term bonds to reflect the needs of their customers. Different groups of investors can act in d...
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A bond is a debt capital market instrument issued by a borrower, who is then required to repay to the lender/investor the amount borrowed plus interest, over a specified period of time. Usually, bonds are considered to be those debt securities with terms to maturity of over 1 year.
List and define the basic characteristics of bonds. List and describe the various types of bonds available. Explain how a bond price is inversely related to its return (yield).
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This paper introduces a new dataset on the composition of the investor base for government securities in the G20 advanced economies and the euro area. During the last decades, investors from abroad have increased their presence in government bond markets. The financial crisis broke this trend.
