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Reasons for higher issuance/ volume of new bonds than stocks
-includes also government bonds
-stocks only one IPO, issuing bonds possible on regular basis
Floating rate bonds
Instead of a fixed coupon rate, the coupon rates of FRNs are periodically reset, e.g.
LIBOR plus 3% (LIBOR = London Interbank Offered Rate)
--> no interst rate risk , no risk of paying more than the market
Inflation protected bonds
Principal is adjusted regularly. It corresponds to the maximum
of original principal and consumer price index adjusted principal.
Yield to maturity:
required interest rate by the market
The yield to maturity for a bond is the interest rate reff such that the present value of
all cashflows calculated with this interest rate equals the bond price.
(average rate of return)
also called IRR internal because it only depends on bonds itself and not on economical conditions
Special case: if the bond trades at face value
YTM= coupon rate
flat term structure
Same interest rate risk for different time to maturity
(Macauly)-duration D
The duration D is the (weighted) average length of capital commitment
Why is Portfolio immunization is not stable over time
because the duration does not decrease by one year when one year passes (only for zerobonds
after 1 year rebalancing is necessary e.g if the inverstor plans to consume in 4 years but duration is 4,3 year investor should invest in some short maturity bonds
Duration effect of low-interest rates for banks
firsthand positive because positive on equity due to higher value for assets but on the other hand margins declined and reinvestment risk increased
yield curve is a representation of
the relationship between market remuneration rates
and the remaining time to maturity of debt securities, also known as the term structure of interest rates
difffernt ways to describe it
Why are discrete and continuously rate quite similar?
Because natural logarithm function has a slope of 1 around the value of 1
Based on which financial instrument is the oil price development (WTI) based
These prices are based on for forward contracts
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