An introduction to bond markets by Moorad Choudhry

By Moorad Choudhry

This e-book describes and defines bonds in the context of the capital markets and the differing kinds of bonds which are traded. It contains a certain examine the analytical ideas utilized in the marketplace through investors and fund managers. This new version will replace the part on swaps and probability administration, replace all routines and examples, upload a brand new part on credits derivatives, upload a piece on established finance securities & upload a piece on buying and selling. Contents additionally comprise: Bond yield dimension, rate of interest threat, the united kingdom gilt industry and company debt markets, danger administration, Off-balance sheet tools, together with swaps and innovations, and abroad and rising markets.

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Term to maturity The term to maturity of a bond is the number of years after which the issuer will repay the obligation. During the term the issuer will also make periodic interest payments on the debt. The maturity of a bond refers to the date that the debt will cease to exist, at which time the issuer will redeem the bond by paying the principal. The practice in the market is often to refer simply to a bond’s ‘term’ or ‘maturity’. The provisions under which a bond is issued may allow either the issuer or investor to alter a bond’s term to maturity.

US Treasuries and Eurobonds – do not have ex-dividend periods and, therefore, trade cum dividend right up to the coupon date. Day-count conventions In calculating the accrued interest on a bond, the market uses the day-count convention appropriate to that bond. These conventions govern both the number of days assumed to be in a calendar year and how the days between two dates are figured. 7. 7 Accrual calculation. actual/365 AI ¼ C Â Actual days to next coupon payment/ 365 actual/360 AI ¼ C Â Actual days to next coupon/360 actual/actual AI ¼ C Â Actual days to next coupon/actual number of days in the interest period 30/360 AI ¼ C Â Days to next coupon, assuming 30 days in a month/360 30E/360 AI ¼ C Â Days to next coupon, assuming 30 days in a month/360 In these conventions, the number of days between two dates includes the first date but not the second.

Clean and dirty bond prices When investors buy a bond in the market, what they pay is the bond’s all-in price, also known as the dirty, or gross price, which is the clean price of a bond plus accrued interest. INTRODUCTION TO BONDS 31 Bonds trade either ex-dividend or cum dividend. The period between when a coupon is announced and when it is paid is the ex-dividend period. If the bond trades during this time, it is the seller, not the buyer, who receives the next coupon payment. Between the coupon payment date and the next ex-dividend date the bond trades cum dividend, so the buyer gets the next coupon payment.

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