Pratical Fixed Income - EISTI 2015

Practical Fixed
Income
Practical Nominal
Fixed Income
I.
Conventions and Curves theories
II.
Bonds, Discounting Methods and Forward
III.
Durations and Convexity Risk
I.
Conventions and Curves theories
Conventions
Base Exact/360 ( Money Market Basis )

Numerator : Period defined with exact number of days ( varies
between 28 to 31)
numerator = exact numbers of days
Denominator :360
Base 30/360 ( Bond Market Basis )

Numerator : Period defined with as months of 30 days max (varies
between 28 to 30)
formula : (J2-J1) + (30 x (M2-M1) ) + (360 x ( A2-A1))
Denominator :360
Conventions
Base Exact/365 ( ZC base)

Numerator : Period defined as exact number of days ( varies between
28 to 31)
formula : numerator = exact numbers of days
Denominator :365
Base Exact/Exact
Numerator : Period defined as exact number of days ( varies between
28 to 31)
formula : numerator = exact numbers of days
Denominator :365 or 366 if bissextile
Conventions
Impact of the different basis

Example : From 09 Jan 2014 to 30 Jun 2014
a) Exact/360 : 0.4777
b) 30/360 : 0.475
c) Exact/365 : 0.47123
d) Exact/Exact : 0.47123
Conventions
Payment Convention
If the payment date comes on non-working day, few rules
apply
Convention Previous Business Day :
o Payment on the previous working day
Convention Following Business Day :

o Payment on the following working day
Convention Modified Business Day :

o Payment on the following working day except if it changes the
payment months
Standard European Curves

EONIA (Euro Overnight Indexed Rate Average)
Daily average rates weighted by interbank deposits in the euro
zone
Capitalized EONIA is used in the OIS Swaps for example
Published by the European Bank Federation
EURIBOR (Euro Interbank Offered Rate)

Average rate at which a sample of European banks are lending
money
Fixing every working days at 11am (French time), maturity from 1
to 12 months
Published by the European Bank Federation
International Standard Curves

Each important financial place has an interbank average rate that
are used as a reference for Swaps in a given currency ( ex: SONIA,
Yield curve
Definition of the yield curve

The yield curve is the term structure of interest rates
Explanations :
For a given maturity and a given credit risk, there is a given
interest rate.
There are many yield curves according to a country, a currency
and of the credit risk
Bonds
Drafting the yield curve
Market curves
Directly defined by the market quotes of financial instruments
(swaps, bonds).
Ex: Government Bonds
Implied curves
Indirectly defined by the market quotes of financial instruments
(swaps, bonds).
Ex: Forward, zero-coupon bond
Standard forms of the yield curves

rate
rate
maturity
rate
maturity
rate
maturity
maturity
Yield curve theory

The theory of anticipation (increasing curve)
The long term rates are the reflection of the anticipation of the
short term rates in the future => anticipated short term rates are
higher than the actual short term rates.
The theory of the preference for liquidity (increasing

curve)
The financial instruments with longer maturity are less liquid and
more risky => the long term rates must be higher
Yield curve theory

The theory of the segmentation (random curve)
Each segment of the yield curve (0-5 years, 5-10 years,> 10
years..) represents segments of the market with their own offer
and demand => independency of the segments
The theory of the preferred segment (random curve)

The actors on the market have a preference for certain segments
on the yield curve. Here the actors can intervene on many
segment of the curve ( difference between the theory of
segmentation)
Yield curve distortions

Parallel distortions
The entire curve is distorted in a uniform way
Ex:
The yield curve increase by 1% on all the maturity
rate
C1
C0
maturity
+1%

Non Parallel distortions
The entire curve is distorted not in a uniform way
1) Steepening
Various possibilities :
rate
Higher long term rates
C1
C0
C1
maturity
Lower short term rates

2) Flattening
Various possibilities :
rate
C1
Higher short term rates

C0
Lower long term rates
C1
maturity

3) Modification of the curve
rate
C0
C1
maturity
Higher MT rates Lower

ST and LT rates
Standard European Curves

3) Modification of the curve
rate
C0
C1
maturity
Higher MT rates Lower

ST and LT rates
II.
Bonds, Discounting Methods and Forward
Bonds
Bloomberg Print Screen:
Bonds
Actuarial Yield :
C
C
C
C
M
P
...
2
3
N
1 y 1 y 1 y
1 y 1 y N
P is the bond price

C is the periodic coupon payment
N is the number of years to maturity
M is the (face value) payment at maturity (100)
y is the yield to maturity or actuarial yield
Bonds
Actuarial Yield :
2.9
2.9
2.9
2.9
2.9
100
99.5
2
3
4
5
1 y 1 y 1 y 1 y 1 y 1 y 5
Bond price is 99.5
Maturity is 5y
Coupon is 2.9%
What s the value of the yield to maturity ???
Bonds
Spot rates :
C
C
C
C
M
...
2
3
N
N
1
r
1 1 r2 1 r3
1 rN 1 rN
P is the bond price

spot rate rn is the discount rate for a cash flow in year n that
can be locked in today
Bonds
Bonds
Advantages of the yield to maturity:
Allows investors to compare different bonds with each
other
Good sensitivity of the bond proxy
Disadvantages of the yield to maturity measure:

Considers the curve flat
Movement only in parallel shift
Discounting ZC method
Maturity from 1day to 12 months:
We use the money market rates ( Euribor) in order
to get the zc rates.
No calculation needed as they are all ready zc
rates.
It is expressed in basis ( exact/360) => we convert
it into exact/365 ( base for zc )
For one day we use the EONIA rate ( money rate)
365
that we convert into zc ratenbasen:
Tzc (1 (TM
360
))
Maturity over 1y :
We use the bootstrapping with the swap rate that is
quoted in the market to get the imply zc rate
100 Tw1
Tw 2
Tw 3

Tw 2 100
Tw 3
Tw 3 100
1
(1 zc1 )1
1
(1 zc 2 ) 2
1
(1 zc 3 ) 3
100
100
100
B A 1 C
ticker
EONIA Curncy
EE0001W Index
EE0001M Index
EE0003M Index
EE0006M Index
EE0009M Index
EE0012M Index
EUSA2 Curncy
EUSA3 Curncy
EUSA4 Curncy
EUSA5 Curncy
EUSA6 Curncy
EUSA7 Curncy
EUSA8 Curncy
EUSA9 Curncy
EUSA10 Curncy
EUSA11 Curncy
EUSA12 Curncy
EUSA13 Curncy
EUSA14 Curncy
EUSA15 Curncy
EUSA16 Curncy
EUSA17 Curncy
EUSA18 Curncy
EUSA19 Curncy
EUSA20 Curncy
EUSA21 Curncy
EUSA22 Curncy
EUSA23 Curncy
EUSA24 Curncy
EUSA25 Curncy
EUSA26 Curncy
EUSA27 Curncy
EUSA28 Curncy
EUSA29 Curncy
EUSA30 Curncy
Market
Rates
0.10%
0.13%
0.18%
0.26%
0.35%
0.29%
0.52%
0.53%
0.73%
0.97%
1.22%
1.44%
1.65%
1.83%
1.99%
2.13%
2.25%
2.35%
2.44%
2.51%
2.56%
2.61%
2.64%
2.67%
2.69%
2.70%
2.71%
2.73%
2.73%
2.73%
2.73%
2.73%
2.73%
2.73%
2.73%
2.72%
Maturity ZC Rates
0.00
0.02
0.08
0.25
0.50
0.75
1.00
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
0.100%
0.132%
0.187%
0.260%
0.355%
0.298%
0.531%
0.531%
0.727%
0.978%
1.230%
1.464%
1.676%
1.868%
2.040%
2.194%
2.328%
2.442%
2.540%
2.620%
2.684%
2.735%
2.773%
2.799%
2.817%
2.830%
2.842%
2.855%
2.851%
2.852%
2.845%
2.841%
2.837%
2.830%
2.823%
2.816%
Forwards and Futures

Definition
A forward is a OTC contract that allows to fix spot the rates of a
loan in a given period and a defined amount.
Forward aims at a future loan/ placement
The operation will actually take place with a redemption of the
notional at the determined rate and for a given maturity (not the
case for a future nor a FRA)
The forward rate curve is calculated thanks to the spot rate curve :
in is based on the market efficiency principal.
Conclusion : The present value of a spot placement at the 1 year
market rate followed by a placement for a year in a year
Must be equal to
The present value of a spot placement at the 2 year market rate

Forward:
As there is no arbitrage, we have the following
formula :
(1 T0,1 )1 (1 F1,1 )1 (1 T0,2 ) 2

T0,N
F1,1
: investment spot rate for N years

: Forward rate for 1year in 1year

FRA: Forward Rate Agreement
Cash settled contract on a short-term loan
OTC
The underlying loan is usually for 3 or 6 months, and quotes
generally for 14, 17, 36, 39, 69 and 612
Buyer of
FRA x, y
means payer of fixed rate in x
Months for y Months
The variable rate is determined at maturity and the

counterparties exchange just the differential with the
fixed rate

FRA: Forward Rate Agreement
Value of the FRA formula :
days
(Tref TFix )
360 )
Value n (
days
(1 Tref
)
360
1
DF (t , T )
FRA(t , T , T ) (
1)
( DF (t , T )
n : notional amount of the

loan
days : number of days the
loan
TFix : EURIBOR
Tref : FRA

Futures : Short term ( cash settlement)
Those futures represent fictive bonds defined with a
nominal, a maturity and a coupon
It is quoted in price by the yield rate
Price Future 100 Yield

Futures : Euribor3m
Maturity 90 days
Notional 1m
K : numbers of contracts
Ft
: Price of the Future at time t
Actual Future Price N (1 (TE 3 M (

P & L K 1000000 ( F f F0 )
90
))
360

Futures : Bund, Bobble, Schatz
Those futures represent fictive bonds defined with a
nominal, a maturity and a coupon
At expiry date, several bonds that exist in the fixed
income market will be deliver at a price that will reply
the future properties

Futures : Bund Future :
Price Future
Price CTD_Bond funding CC CTD_ Bon d

ConversionFactor

The conversion Factor is specific to each cheapest and
is calculate at the issue of the new future ( same YTM
between the future and the cheapest)
quick approximation :
ConversionFactor
PVCTD_Bond (YTM Futurediscounted )

Price Future

Issue 07/06/2014 : Bund Future =143
CTD Price : YTM = 1.545
ConversionFactor
PVCTD_Bond (YTM Futurediscounted )

Price Future

F : Price at t0
0
Ff : Price at tf ( closing of the trade)
K : Numbers of Contracts
P & L k 100000 ( F f F0 )

III. Durations and Convexity Risk

Taylor-Young Formula
Formula :
2
h
h
f(x 0 h) f(x 0 ) h f ' (x 0 )
f '' (x 0 ) ...
f n (x 0 )
2!
n!

Duration : Macauly Duration
It measures of average maturity of the bonds
expected cash flows
Formula :
PV (Ct )
D t
PV(Bond)
t 1
C1
C2
CN
1
...
N
(1 y ) 2
(1 y ) N
(1 y )1
D
C1
C2
CN
...
(1 y )1 (1 y ) 2
(1 y ) N

Duration : Macauly Duration
Duration is shorter than maturity for all bonds

except zero coupon bonds
Duration of a zero-coupon bond is equal to its

maturity

Modified duration :
Formula :
Dm
Duration
1 y
Direct measure of price sensitivity to interest

rate changes

Modified duration :
Formula :
Ct
P
1 N
Ct
t
(1 y ) t
(
1
y
)
y
1
y
t 1
t 1
Dm P
1 P
Dm
P y
Dm measures the sensitivity of the % change in bond price

to changes in yield

Convexity Risk:
Formula :
CFt
2
(1 y )t (t t )
t 1
1 2P
Convexity
P 2 y
2P
1
2 y (1 y ) 2

Convexity Risk:

Convexity Risk:
Measures how much a bonds price-yield

curve deviates from a straight line
Second derivative of price with respect

to yield divided by bond price
improve the duration approximation for bond
price changes

Example : DBR 4.75% 04/07/28


Example :
( Price : 131.64; yield : 2.171)
DBR 4.75% 04/07/28
Duration : 11.053
Modify Duration : 10.817

Convexity : 1.487
Bund
( Price : 142.95)
Duration : 8.382
Modify Duration : 8.254

Convexity : 0.799

Future Hedge Ratio : Bund
In order to cover our rate risk, we use the

Modify Duration of our bond vs the Modify
Duration of the CTD bond
Ratio :
Ratio
MarketValu eBond MDBOND
ConversionFactor
Pr ice (CTD) 1000 MDCTD
Where MD is the modify duration

Example :
Hedge Ratio :
For 25m DBR 4.75% 04/07/28 , we have 302

bund contracts
Ratio
131.64
10.817
0.695531
99.54 1000 8.254
Fixed Income Product : Swap

Swap :
A swap is an over-the-counter (OTC) derivative transaction where

the counterparties
agree to exchange cash flows linked to specific
market rates for a period of time
One set of cash flows will typically be known usually expressed as a

fixed rate of interest
The other set of cash fows will be unknown
example : Euribor6m
LIBOR payments the present value of both sets of cash flows is the same at inception.
unknown
Fixed payments
Periodic exchange of cash

flows for life of
transaction
Fixed Income Product : Asset Swap Par/Par

Asset Swap Par / Par :
An asset swap is a derivative transaction that results in a
change in the form of future cash flows generated by an asset
In the bond markets, asset swaps typically take fixed cash
flows on a bond and exchange them for Euribor + spread (i.e. floating
rate payments)
At inception the investor and the counterparty exchange the

following flows :
Fixed Income Product : Asset Swap Par/Par

Asset Swap Par / Par :
Fixed Income Product : Z-Spread

Z- Spread:
The Z-spread is a purely theoretical concept designed to

allow a bond yield to be compared to a swap rate as fairly as
possible
The Z-spread is defined as the size of the shift in the zero

coupon swap curve such that the present value of a bonds
cash flows is equal to the bonds dirty price
Pure RV indicator
Practical Inflation
Fixed Income
I.
Inflation Market
II.
Inflation Products and Inflation Curve
III.
RV Strategy
I.
Inflation Market
Inflation Market
Clients
Inflation
Markets
Region
s
Instrumen
ts
Inflation Market
Client
s
HEDGING
RELATIVE VALUE
* Pension Funds
* Hedge Funds *
* Insurance
BENCHMARKI
Companies
NG
* Retail
ISSUERS
* ALM / Treasury *
* Pension Funds
* States
* Insurance
* ALM / Treasury
* Inflation
* Agencies
Companies
* Corporates
Funds
* Corporates
* Retail
* Utilities
* Mutual Funds
* Inflation Funds *
* Infrastructure
* Asset Swap
Projects
Investors
* Real Estate
Companies
*Receiver
*Payer
Inflation Market
Inflation Payers :
Payers of inflation are entities that receive inflation cashflows in their
natural line of business as their income is linked to inflation. Therefore
theyll sell it in the inflation market. ( sovereigns will issue inflation
bonds for example)
Inflation Receivers :
Inflation receivers are entities that pays inflation cashflows in their
natural line of business as their liabilities are linked to inflation.
Therefore theyll buy it in the inflation market. ( PF will be short on their
long term inflation liabilities if they dont buy inflation securities to
counterbalance their shortfall risk)
Shortfall risk: risk that their assets drop below their liabilities
Inflation Market
Regio
ns
EUROPE
UK
The most
sophisticated
derivatives market
The first market to

issue a linker
The longest linkers
Balanced buyers and
sellers
Huge corporate
issuance
Plenty of contractual
buyer and seller of
inflation
LPI vs RPI
Retail demand:
linker format
ASW investors
Big cash market,

international interest
More buyers than
sellers
Domestic indices
Sale/leaseback
Retail demand: more
to structured
products
A lot of ASW
investors
USA
Biggest cash
market
ASW investors
Limited options
appetite
Lack of
contractual
buyer or seller
of inflation
JAPAN &
AUSTRALIA &
EM
Japan- mainly
on bonds
Deflation is an
issue
Australiasimilar to the
UK
EM- LatAm is
growing fast
On shore/off
shore
Inflation Market
Fig. 1:
Weights in the US CPI
Source: Deutsche Bank
6
Fig. 2:
Weights in the UK RPI
Source: Deutsche Bank
Food and
beverages
Housing
Apparel
Transportatio
n
Medical Care
Recreation
Education and
Communicati
on
Other
7
%
17
42
Fig. 3:
Weights in the EUR
Source: Deutsche
Bank
9
9
4
7
1
10
16
7
16
Food & beverages

Alcohol & tobacco
Clothing & footwear
Housing & household
services Furniture &
household goods Health
Transport
Communication
Recreation &
culture Education
Restaurants &
hotels
Other goods & services
165
257
88
82
408
Food and catering

Alcohol and tobacco
Housing and
household
expenditure
Personal
expenditure
Travel and leisure
Inflation Market
CPI
Published every month
Delay between the months and the publication of the figure cannot be used directly
for indexation
An indexation lag is then needed (for example 3 months for OATeis)
DRI
In order to calculate accrued interest on inflation, one has developed a daily

reference index (DRI)
Daily figure calculated as a linear interpolation between the published CPI with a 2
and 3-month lag
DRI (01 May 2013) = CPI (Feb 2013) = 115.55

2013) = 116.94
DRI (01 June 2013) = CPI (March
DRI (10 May 2013) = linear interpolation between the 2 figures

Ma
y
20
13
Inflation Products
alculation
Publication
20 Apr
Publication
20 Mar
116.94
116.71
116.48
116.25
116.01
115.78
115.55
15 20
5 10
01-Feb
01-Mar
01-Apr
01-May
25
01- Jun
CPIFeb
115.55
CPIMar
116.94
Ma
y
20
13
Inflation Market
Instrume
nts
VOLATILITY
REAL YIELD
Inflation-linked
bonds
Nominal bonds vs
inflation swaps
BREAKEVEN
Inflation swaps
Inflation-linked
bonds vs
nominal swaps
ASW
Bond asset
swaps
Cash
breakeven vs
swaps
breakeven
Caps & Floors

Swaptions
ASW options
Bond options
Real rate vol
Inflation Market
Nominal yield
Real yield
OATei...)
Breakeven inflation (BEI)
5.00%
Yield of a conventional government bond (Treasury, Gilt, OAT...)

Yield of an inflation-linked government bond (TIPS, Indexed Gilt, OATi,
Inflation implied by the level of real and nominal yields
Breakeven inflation
Real yield
4.00%
Nominal yield
3.00%
2.00%
1.00%
0.00%
-1.00%
0
10
15
20
25
30
The Fisher Equation: (1+ Nominal Yield) = (1+ Real Yield)* (1+ Breakeven
Inflation)
Real Yield ~ Nominal Yield Breakeven Inflation
7
2
Inflation Market
Yield oat oct23 = be oati23 + Real Yield oati23
7
3
Inflation Market
Inflation Expectation + (Liquidity Premium + Risk Premium)
Break-Even Inflation
Break-Even mainly indicates how much inflation the

market expects.
Liquidity Premium : as inflation bonds are less liquid
than nominal bonds the market price a liquidity
Premium
Risk Premium : If inflation uncertainty is high than

premium investor demand for holding such bond is
high as they are risk averse
Inflation Market
Infation bond Structure
Real Yield :
C
C
C
C
M
P
...
2
3
N
1 yr 1 yr 1 yr
1 yr 1 yr N
P is the bond price

y is the yield to maturity or actuarial yield
Inflation Market
Infation bond Structure
cpi N
cpi N
cpi1
cpi2
C
C
C
M
P
...
2
N
N
1 yn base 1 yn base
1 yn base 1 yn base

yn is nominal yield
Base is the cpi at the issue time
cpit : cpi at time t
The Fisher Equation: (1+ Nominal Yield) = (1+ Real Yield)* (1+ Breakeven
Inflation)
Real Yield ~ Nominal Yield Breakeven Inflation
Inflation Market
Infation bond
Inflation Market
Infation bond
II.
Inflation Products

Zero-coupon (ZC) infation swap indicative prices
(1+X%)
-1
Expected cashfows
The Buyer
SELLE
R
BUYE
R
Receive Compounded Inflation at Maturity:

CPIt/CPI0 -1
Pay a known Fixed cash-flow at Maturity
(1 + X%)^t -1
Cumulative Inflation-1
Index T
Index 0
Cumulative Inflation =
8
0

Zero-coupon (ZC) infation swap indicative prices
8
1
ero-coupon (ZC) infation swap Market Convention
82

Building an infation curve Yearly tenor
For every year t:
CPI t
is calculated by the following formula :
(CPI t ) t ( Base) (1 zc t ) t
Base : CPI of reference for the swap curve ( 3m lag no
interpolate for EUR)
zc t
: zero coupon inflation swap at maturity t
83

For every year t:
ZC : the inflation ZC swap
curve is quoted in the
inflation market
84

For every year t:
Base ( nov2013) :116.86
We are in Fev14 with a 3m
lag, the base is in nov13
85

Building an infation curve seasonality vector
For monthly tenor: we need to incorporate seasonality

Tt
(CPI t ) t (CPI T0 ) exp( [ f (u ) s (u )]du )

T0
12
In year period of time we have
s
i 1
We use the inflation swap rate f for the period [To;Tt ] : exp(
Tt
f (u )du )
T0
86

For CPI(07/16), we have the following :

CPI (07/16) CPI (11/15) exp(
8 zc 3
) * exp( s12 s1 s 2 s 3 s 4 s 5 s 6 s 7 )
12
We are in Feb 2014 therefore inflation swap curve is base on nov 13 for the eur
inflation curve
is the 3yrs inflation zc swap rate
zc 3
The seasonality from dec to july we add the item of our seasonality vector
CPI (11/15) base (1 ZC 2 ) 2
nov13 and
where the base is equale to the cpi on
zc 2
is the 2yrs inflation zc swap rate
87

We define a seasonality vector using Eurostat model :

http://sdw.ecb.europa.eu/browseTable.do?
ICP_ITEM=X02200&DATASET=0&node=2120778&REF_AREA=308&SERIES_KEY=122.ICP.M.U2.N.X022
00.4.INX&SERIES_KEY=122.ICP.M.U2.S.X02200.3.INX
88

We can realize that the seasonality vector is getting

more and more strong over the years.
89
dditive infation swap & Real rate swap indicative prices
Expected cashfows
Libor +/- margin

Client
Bank
Inflation Leg
Libor Leg
3.88%
X% + YoY Inflation
Floored @ 0.00%
YoY Inflation =
Index t
1
Index t 1
4.07%
4.18%
4.30%
2.77%
-2.25%
-3.35%
-4.17%
-4.57%
-4.90%
9
0
ditive infation swap & Real rate swap indicative prices
More balanced cashflow profile
It is a play on real rates
Party A pays: YoY Inflation + X%
vs
Party B pays: Libor
X% is the real rate at the time of the trade
Party A is receiver in this real rate swap
If you believe real rates are going to increase, you want to be Party A
If you believe real rates are going to decrease, you want to be Party B
Widely traded by
Retail banks
Private banks
Asset managers
Corporates- as payer of
91
Infation-linked annuity swap indicative prices

Expected cashfows
Cumulative Inflation t -1
Inflation Leg
13.67%
11.23%
Fixed Leg
8.64%
Bank
Client
(1+X%) -1
5.89%
2.97%
-2.83%
-5.80%
-8.55%
-11.49%
-14.44%
Cumulative Inflation t =
Index t
Index 0
9
2

Infation-linked annuity swap indicative prices
Combination of zero-coupon swaps with different maturities with additional constraint
of having the same fixed rate for each swap
Hedges a periodic string of cashflows that increase with inflation each year like
rental income
Cashflows do not have to be the same
Widely traded by
Project finance linked entities
Insurance companies
Pension funds
93
Infation Asset Swap Par-Par
Issu
er
At inception:
Inflation-linked BOND
Dirty Price Adjustment (could be positive or negative)
Libor +/- asw margin
Client
Bank
Bond Coupons,
paid on inflation-adjusted
notional
At maturity:Inflation Uplift, Floored at 0%
9
4
Infation Asset Swap Par-Par

Expected cashfows
3.26%
2.23%
3.95%
4.18%
-1.75%
-1.80%
4.33%
Libor +/- asw margin
Client
Bank
X% * Cumulative Inflation
-1.68%
-1.71%
Inflation Leg
Libor Leg
At maturity:
100% * Max (Cumulative Inflation-1, 0.00%)
-13.38%
Index T
Index 0
Cumulative Inflation =
95

Pratical Fixed Income - EISTI 2015

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Pratical Fixed Income - EISTI 2015

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Practical Fixed

Conventions and Curves theories

Bonds, Discounting Methods and Forward

Durations and Convexity Risk

Conventions and Curves theories

Base Exact/360 ( Money Market Basis )

Base 30/360 ( Bond Market Basis )

Base Exact/365 ( ZC base)

Impact of the different basis

Convention Following Business Day :

Convention Modified Business Day :

Standard European Curves

EURIBOR (Euro Interbank Offered Rate)

International Standard Curves

Definition of the yield curve

Drafting the yield curve

Standard forms of the yield curves

Yield curve theory

The theory of the preference for liquidity (increasing

Yield curve theory

The theory of the preferred segment (random curve)

Yield curve distortions

Yield curve distortions

Higher long term rates

Lower short term rates

Yield curve distortions

Higher short term rates

Yield curve distortions

Higher MT rates Lower

Standard European Curves

Higher MT rates Lower

Bonds, Discounting Methods and Forward

P is the bond price

What s the value of the yield to maturity ???

P is the bond price

Disadvantages of the yield to maturity measure:

that we convert into zc ratenbasen:

Forwards and Futures

Forwards and Futures

(1 T0,1 )1 (1 F1,1 )1 (1 T0,2 ) 2

: investment spot rate for N years

Forwards and Futures

means payer of fixed rate in x

Months for y Months

The variable rate is determined at maturity and the

Forwards and Futures

n : notional amount of the

Forwards and Futures

Price Future 100 Yield

Forwards and Futures

: Price of the Future at time t

Actual Future Price N (1 (TE 3 M (

Forwards and Futures

Forwards and Futures

Price CTD_Bond funding CC CTD_ Bon d

Forwards and Futures

PVCTD_Bond (YTM Futurediscounted )

Forwards and Futures

CTD Price : YTM = 1.545

PVCTD_Bond (YTM Futurediscounted )

Forwards and Futures

Forwards and Futures