At the moment, interest rates are low but when interest rates go high, valuations go low and

prices go low.
Fixed income assets will be most severely affected.
Deficit in a given year should not exceed 2%.
Therefore, to handle ratios higher than 2%->stop spending, raise taxes, cut down benefits,
sack government employees.
European financial stability facility
Deflation is bad because consumers postpone spending.

Mat 15 Nov 2006 18.8billion

18.8b*C/2
15 May 2006 C/2
15 Nov 2005 C/2
express price as a percentage of face value/par value.

1/1/2016 C
29/2/2016 2/12 C
1/1/2017 C

1/1/2001
25/2/2001
In Jan-> 2/1/2001 to 31/1/2001-> 30 days
In Feb-> all days-> 28 days
In Mar-> 1/3/2001 to 25/3/2001->25 days

1. Actual/360 basis
83 days/360 basis
2. Actual/Actual basis
83 days/365 or 366
3. 30/360 basis
For swap
Assume every month is 30 days long and every year has 12 such months.
Jan->01/01/2001 to 30/01/2001->29 days
Feb->all days->30 days
Mar->01/03/2001 to 25/03/2001->25 days
Total->29+30+25->84 days
84 days/360 basis

Last C date-> pays C->15 April 1999

Today 25 Oct 1999 x y
Next C date-> pays C -> 15 April 2000
Maturity date 15 April 2008

April 15
May 31
June 30
July 31
August 31
September 30
October 25

Bonds:
Accrued interest up to tomorrow because you will hold/own the bond up until tomorrow.
Already own the bond:1 year
Purchase the bond:1 year – 1 day of accrued interest

Strips:
No cash flows after maturity.
A bunch of zero coupon bonds.
Payout matches payout of their liabilities.
More secure.

Floating rate notes:

Higher rate investment
Coupon rate rises as LIBOR rate rises and it is interesting to hold this bind in an increasing
LIBOR rate environment because valuations go up.
Interest rate rises, values drop but these bonds drop less because the numerator i.e. coupon
rate will increase too along with the denominator i.e. interest rate ensuring a smaller
drop/depreciation than bonds that pay fixed coupons.
Low correlation with fixed rate bonds.
Provide diversification in investment portfolio and a good way to hedge interest rate risk.

Inverse floaters/
Coupons rise when interest rate drops ie valuation increases significantly.
Therefore, hope is for 3-year treasury bond rates to drop and good investment in dropping
interest rate environment.

Inflation-indexed bonds
C(1+i)
C(1+i)2
(C+Par)(1+i)3
hedging inflation risks because does not depreciate as inflation rises even though stocks,
fixed-coupon bonds and cash investments depreciate.
Just has interest rate risk.
High inflation->cost of producing for firms rises because salaries and raw materials will rise.
Associated with massive drop in equity and fixed income valuation.