Premium Essay

Fins 2624 - Portfolio Management Notes

In:

Submitted By freddyfreddo
Words 14579
Pages 59
Cheryl Mew

FINS2624 – Portfolio Management

Semester 1, 2011

L ECTURE 1 – B OND PRICING
W HAT IS A BOND?
A bond is a claim on some fixed future cash flows.
A commonwealth government bond (CGB) is a bond which pays semi-annual coupons, in which the maturity date/ coupon payment date is on the 15th of every month.
A zero coupon bond is a bond with no coupons.
The important information of a bond:
1.
2.
3.
4.
5.
6.

Transaction date: T
Settlement date:T+2
Coupon payment dates
Maturity date
YTM
Coupon rate


1.
2.

Cum-interest or Ex-interest?
If ex-interest
If> 7 days to the next coupon payment-----> cum-interest

Y IELD TO MATURITY
The Yield to Maturity (YTM) of a bond is:



Interest rate that makes the present value of the bond’s payments equal to its price.
Determined by the market, reflecting annual rate of return required by market.

The Relationship between YTM and Bond Price:




 YTM =  Price AND  Price Sensitivity
 YTM =  Price AND  Price Sensitivity
When YTM = C = 10%, P = FV = $100 o C = YTM, P = FV – Par Bond o C < YTM, P < FV – Discount Bond o C > YTM, P > FV – Premium Bond

N O ARBITRAGE PRINCIPLE

An arbitrage is a set of trades that generate zero cash flows in the future, but a positive and risk free cash flow today. This is done through the violation of law of one price.
An arbitrage trade is done by selling the real instrument, and buying a synthetic instrument (replicating strategies or portfolios). By constructing a synthetic bond and buy the under-priced real bond and selling
1

Cheryl Mew

FINS2624 – Portfolio Management

Semester 1, 2011

overpriced synthetic bond, an arbitrage opportunity exists, where people can earn money, whilst not incurring any risk.
In Fins 2624, we employ the No Arbitrage Principle – i.e. same bonds will have the price.

B OND PRICING

Similar Documents

Free Essay

Fins2624 Course

...Australian School of Business School of Banking and Finance FINS 2624 Portfolio Management Course Outline Semester 2, 2012 Part A: Course-Specific Information Part B: Key Policies, Student Responsibilities and Support Table of Contents 0 PART A: COURSE-SPECIFIC INFORMATION 1 2 2.1 2.2 2.3 2.4 2.5 3 STAFF CONTACT DETAILS COURSE DETAILS Teaching Times and Locations Units of Credit Summary of Course Course Aims and Relationship to Other Courses Student Learning Outcomes LEARNING AND TEACHING ACTIVITIES 1 1 1 1 1 1 2 2 3 3 4 4 4 5 6 6 5 6 7 1 2 2.1 2.2 2.3 2.4 2.5 3 4 COURSE RESOURCES COURSE EVALUATION AND DEVELOPMENT COURSE SCHEDULE ACADEMIC HONESTY AND PLAGIARISM STUDENT RESPONSIBILITIES AND CONDUCT Workload Attendance General Conduct and Behaviour Occupational Health and Safety KeepingInformed SPECIAL CONSIDERATION AND SUPPLEMENTARY EXAMINATIONS STUDENT RESOURCES AND SUPPORT 7 7 8 1 1 1 1 1 2 2 2 2 4 3.1 Approach to Learning and Teaching in the Course 3.2 Learning Activities and Teaching Strategies 4 ASSESSMENT 4.1 Formal Requirements 4.2 Assessment Details 4.3 Late Submission PART B: KEY POLICIES, STUDENT RESPONSIBILITIES AND SUPPORT PART A: COURSE-SPECIFIC INFORMATION 1 STAFF CONTACT DETAILS Lecturer-in-charge: Joakim Bang Room 311 Phone No: 9385 55484 Mobile: 04 0870 7830 (please keep it roughly within office hours) Email: j.bang@unsw.edu.au Consultation Times: Mondays 15:00 to 17:00, ASB 311. That's in my office in the west wing of the ASB building. Please...

Words: 4844 - Pages: 20

Free Essay

Financial Scandals and the Role of Private Enforcement: the Parmalat Case

...Financial Scandals and the Role of Private Enforcement: The Parmalat Case Law Working Paper N° 40/2005 May 2005 Guido Ferrarini University of Genoa, Centre for Law and Finance and ECGI Paolo Giudici Free University of Bozen and Centre for Law and Finance © Guido Ferrarini and Paolo Giudici 2005. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. This paper can be downloaded without charge from: http://ssrn.com/abstract=730403 www.ecgi.org/wp ECGI Working Paper Series in Law Financial Scandals and the Role of Private Enforcement: The Parmalat Case Working Paper N° 40/2005 May 2005 Guido Ferrarini Paolo Giudici This Working Paper is based upon a draft prepared for the EU Corporate Law Making Conference (Cambridge, October 29-30, 2004) organized by Harvard Law School and the Swiss Federal Institute of Technology (ETH Zurich). The authors are grateful to Gerard Hertig, Mark Roe, Donald Langevoort, and other conference participants for helpful comments. Drafts of this paper were also presented at the Yale Law School Alumni Meeting on October 8-10, 2004; at a meeting of the Associazione Via Isonzo held in Milan on October 10, 2004; and at a seminar at the Institute of Law and Finance (ILF), University of Frankfurt, on January 18, 2005. The authors are grateful to Theodore Baums, Andreas Cahn, Carmine Di Noia, Jon Macey,...

Words: 25640 - Pages: 103