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FIN5823FIXEDINC.SEC.DISC..pptxFIN 5823 FINANCIAL MODELING ______________________________________________ Fixed Income Securities
Introduction to Fixed Income Securities
Outline
Introduction to the Course
Why a separate course only on Fixed Income Securities?
What are fixed-income securities?
Participants/Players
Meaning of a Bond
Features of a Bond
Types of Bonds
Sources of Risk and Return in Debt Securities
Regulation of Fixed Income Securities
Why a Separate Course on Fixed Income Securities?
Markets Prior to 1980s
Dominated by plain vanilla bonds with simple cash flow structures
Valuation was simple and straightforward
Markets After 1980s
Complex cash flow structures
A variety of securities
Derivative products to facilitate portfolio strategies to control interest rate risk and to enhance return
Wider range of investors
Two thirds of the market value of all the securities outstanding in world classified as fixed income
Most participants in the corporate and financial sectors participate in this market
Federal governments, state governments, and municipalities have not choice but to issue fixed income securities
Therefore, a need to have well informed participants so that they understand
the forces that drive the bond market
The valuation of complex cash flow structures
Portfolio management strategies
Objective of this Course
A detailed coverage of the fixed income securities markets in contrast to one or two chapters in a book on investments
Coverage of securities available in the market—Treasury, Agency, Municipals, International, Mortgage, Mortgage-backed securities, CMOs.
What are fixed Income Securities?
Financial claims issued by government, government agencies, state governments, corporations, municipalities, and banks and other financial institutions
The cash flows promised to the buyer of fixed income securities represent contractual obligations of the respective issuers.
Typically, when such contractual obligations are not met, the buyers of fixed income securities will have the right to take control of the firm that issued such debt securities
A fixed income security is a financial obligation of an entity that promises to pay a specified sum of money at specified future dates. The entity promising the payment is called the issuer of the security
Two categories:
Debt obligations—Bond Markets
Preferred Stock
Participants
Issuers/sellers
government, government agencies, state governments, corporations, municipalities, and banks and other financial institutions
To receive a fair value for their securities
Be able to issue securities that best fit their needs
Investors
Large institutions such as pension funds, insurance companies, commercial banks, corporations, mutual funds, and central banks
Smaller institutions
Individual investors
Participants
Objective is to buy/sell at a fair market price and at narrow bid/offer spread.
Intermediaries
Help issuers in the initial offering of the security, assist in pricing and distribution of the securities, make a secondary market, provide liquidity, and engage in proprietary trading activities
Produce information about credit quality of different issuers
Provide liquidity and credit enhancement for a fee
Bond Markets
Global Bond Markets
U.S. Bond Markets
Meaning of a Bond
A debt instrument requiring the issuer also called the debtor or borrower to repay to the lender/investor the amount borrowed plus interest over some specified period of time
A typical “plain vanilla” bond issued in the U.S. specifies
A fixed date when the amount borrowed is due
The contractual amount of interest, which is typically paid every six months
Cash flow pattern is know assuming no default
