- 9 Sections
- 63 Lessons
- 53 Weeks
- CHAPTER 1: OVERVIEW OF FIXED INCOME SECURITIES5
- 1.11.1 Basic Features of a Fixed-Income Securities52 Weeks
- 1.21.2 Types of Fixed Income Securities53 Weeks
- 1.31.3 Legal, Regulatory and Tax Considerations on the Issuance and Trading of Fixed Income Securities53 Weeks
- 1.41.4 Structure of Bond’s Cash Flows and Bonds with Contingency Provisions52 Weeks
- 1.51.5 Risks Associated with Fixed Income Securities53 Weeks
- CHAPTER 2: FIXED-INCOME MARKETS: ISSUANCE, TRADING AND FUNDING3
- CHAPTER 3: FUNDAMENTALS OF FIXED INCOME VALUATION10
- 3.13.1 Introduction53 Weeks
- 3.23.2 Determination of Price of the Bond Given a Market Discount Rate53 Weeks
- 3.33.3 Relationships among a bond’s price, coupon rate, maturity, and market discount rate (yield-to-maturity)30 Minutes
- 3.43.4 Bond Price Quotation53 Weeks
- 3.53.5 Matrix Pricing of a Bond30 Minutes
- 3.63.6 Yield Measures for Fixed-Rate Bonds, Floating-Rate Notes, and Money Market Instruments53 Weeks
- 3.73.7 Term Structure of Interest Rate53 Weeks
- 3.83.8 Spot Curve, Yield Curve on Coupon Bonds, Par Curve, and Forward Curve53 Weeks
- 3.93.9 The Maturity Structure of Interest Rates53 Weeks
- 3.103.10 Bond Refinancing/Refunding53 Weeks
- CHAPTER 4: FIXED INCOME RISK AND RETURN9
- 4.14.1 Introduction53 Weeks
- 4.24.2 Return from Investing in a Fixed-Income Bond53 Weeks
- 4.34.3 Bond Duration Measures53 Weeks
- 4.44.4 Effective duration as a Measure of Interest rate risk for bonds with embedded options30 Minutes
- 4.54.5 Key rate durations as a Measure of sensitivity of bonds to changes in the shape of the benchmark yield curve30 Minutes
- 4.64.6 Effect of a bond’s maturity, coupon, embedded options, and yield level on its interest rate risk53 Weeks
- 4.74.7 Bond Convexity53 Weeks
- 4.84.8 Interest rate risk and the investment horizon53 Weeks
- 4.94.9 Effect of changes in credit spread and liquidity on yield-to-maturity of a bond and how duration and convexity can be used to estimate the price effect of the changes53 Weeks
- CHAPTER 5: CREDIT RISK MANAGEMENT4
- CHAPTER 6: THE TERM STRUCTURE AND INTEREST RATE DYNAMICS7
- 6.16.1 Introduction53 Weeks
- 6.26.2 Relationships among Spot Rates, Forward Rates, Yield to Maturity, Expected and Realized Returns on Bonds, and the Shape of the Yield Curve30 Minutes
- 6.36.3 Forward Pricing and Forward Rate Models: Determination of Forward and Spot Prices and Rates using those Models53 Weeks
- 6.46.4 Yield Curve Movement and The Forward Curve53 Weeks
- 6.56.5 The Swap Rate Curve53 Weeks
- 6.66.6 Review of Traditional Theories of the Term Structure of Interest Rates and their Implications to Forward Rates and the Shape of the Yield Curve53 Weeks
- 6.76.7 Modern Term Structure Models53 Weeks
- CHAPTER 7: THE ARBITRAGE-FREE VALUATION FRAMEWORK6
- 7.17.1 Introduction53 Weeks
- 7.27.2 Overview of Arbitrage Valuation of a Fixed-Income Instrument53 Weeks
- 7.37.3 Computation of the arbitrage-free value of an option-free, fixed-rate coupon bond53 Weeks
- 7.47.4 Binomial Interest Rate Tree Framework53 Weeks
- 7.57.5 Zero-Coupon Yield Curve, Arbitrage-Free Valuation and Pathwise Valuation53 Weeks
- 7.67.6 Monte Carlo Forward-Rate Simulation and Its Application53 Weeks
- CHAPTER 8: VALUATION AND ANALYSIS OF BONDS WITH EMBEDDED OPTIONS10
- 8.18.1 Introduction30 Minutes
- 8.28.2 Overview of Fixed-Income Securities with Embedded Options53 Weeks
- 8.38.3 Valuation and analysis of callable and putable bonds53 Weeks
- 8.48.4 Effect of Interest Rate Volatility on the Value of a Callable or a Putable Bond53 Weeks
- 8.58.5 Effect of Changes in the Level and Shape of the Yield Curve on the Value of a Callable or a Putable Bond30 Minutes
- 8.68.6 Valuation and Analysis of Callable and Putable Bonds with Interest Rate Volatility53 Weeks
- 8.78.7 Bond’s Effective Duration in Practice30 Minutes
- 8.88.8 Effective Convexities of Callable, Putable, and Straight Bonds30 Minutes
- 8.98.9 Determination of the Value of a Capped or Floored Floating-Rate Bond30 Minutes
- 8.108.10 Valuation and Analysis of Convertible Bonds30 Minutes
- CHAPTER 9: CREDIT ANALYSIS MODELS9
- 9.19.1 Introduction30 Minutes
- 9.29.2 Traditional Credit Models30 Minutes
- 9.39.3 Strengths and Weaknesses of Credit Ranking30 Minutes
- 9.49.4 Structural models of corporate credit risk30 Minutes
- 9.59.5 Reduced form models of corporate credit risk30 Minutes
- 9.69.6 Assumptions, strengths, and weaknesses of both structural and reduced form models of corporate credit risk30 Minutes
- 9.79.7 Term structure of credit spreads30 Minutes
- 9.89.8 Credit analysis required for asset-backed securities30 Minutes
- 9.99.9 Analysis of corporate debt30 Minutes
Curriculum
1.1 Basic Features of a Fixed-Income Securities
Based on total market value, fixed-income securities constitute the most prevalent means of raising capital globally.
A fixed-income security is a financial obligation of an entity (the issuer) that promises to pay a specified sum of money at specified future dates.
A fixed-income security is an instrument that allows governments, companies, and other types of issuers to borrow money from investors. Any borrowing of money is debt.
The terms “fixed-income securities,” “debt securities,” and “bonds” are often used interchangeably.
Securitised bonds are created from a process called “securitisation,” which involves moving assets into a special legal entity.
This legal entity then uses the assets (such as mortgages, auto loans, student loans, credit card receivables, etc.) as guarantees to back (secure) bond issue, leading to the creation of securities bonds.
There are three important elements when investing in a fixed-income security:
- The bond features, including the issuer, maturity, par value, coupon rate and frequency, and currency denomination.
- The legal, regulatory, and tax considerations.
- The contingency provisions that may affect the bond’s scheduled cash flows.
All bonds, whether they are traditional or securitised bonds, are characterised by the same basic features.
Creditworthiness
- Based on creditworthiness, bonds can be investment-grade or non-investment-grade (high yield, speculative).
- The three largest credit rating agencies are Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. Investment-grade bonds are Baa3 or BBB– or higher.
- Higher-grade bonds are expected to have lower credit risk.
Issuers
- Supranational organisation – include international organizations such as world bank, IMF, United Nations, etc.
- Sovereign (national) government – governments usually issue debt (treasury bond and bills) through the central banks.
- Non-sovereign (local) government – these are entities that have government guarantee such as municipal or local governements (county governments).
- Quasi-government entity – Quasi-government entities are special purpose bodies established by government or parliament to accomplished a certain purpose.
- Company (Corporate) – reputable firms often raise capital in the debt market by issuing bonds and short-term securities such as corporate papers.
Maturity
- The maturity date is the date when the issuer is obligated to redeem the bond.
- The tenor, also known as term-to-maturity, is the time remaining until the bond’s maturity date.
- Money market securities are fixed-income securities with maturity up to one year.
- Capital market securities are fixed-income securities with maturity longer than one year.
Par value (principal) of a bond
- The par value of a bond is the amount the issuer agrees to repay the bondholders on the maturity date.
- Other names for par value are face value, nominal value, redemption value, and maturity value.
- Bonds can have any par value.
- Bond prices are often quoted as a percentage of their par value.
Coupon rate and frequency
- The coupon or nominal rate (yield) of a bond is the interest rate that the issuer agrees to pay each year until the maturity date. Spreads are usually expressed in basis points (bps). One basis point is equal to 0.01%.
- The coupon is the annual amount of interest payments and is determined by multiplying the coupon rate by the par value of the bond.
- Plain vanilla bonds pay a fixed rate of interest.
- Floating-rate notes (FRNs) or floaters pay a floating rate: a reference rate plus a spread. (A popular reference rate for FRNs is Libor (London interbank offered rate) and T-bill rate in Kenya).
- Bonds that do not pay interest are called “zero-coupon bonds.”
Currency denomination
- Bonds can be issued in any currency, mostly currency of issuing country.
- Dual-currency bonds make coupon payments in one currency and pay the par value at maturity in another currency.
- Currency option bonds are a combination of a single currency bond plus a foreign currency option.
- Several yield measures are used by market participants. For example, nominal yield (i.e., coupon rate), current (i.e., running) yield, yield to maturity, and others.