Bond laddering is a powerful investment strategy especially for investors who depend on their investments for income on a regular basis. This applies to investments in various fixed income instruments such as Certificates of Deposits (CDs), US Treasury Notes, Municipal Bonds, Corporate Bonds, as well as zero-coupon bonds. The key principle behind the bond laddering […]
Fixed Income Securities
How to Calculate Option-adjusted Spread (OAS) of a Bond
Option adjusted spread is a measure of the credit risk in option-embedded bonds such as callable and putable bonds. As the name explains, it is the spread after adjusting (removing) the option from the bond. So, from the bond, we remove the value of the embedded option, which gives us the spread of the option-free […]
New Course – Fixed Income Markets
We are pleased to announce the addition of a new course – Fixed Income Markets – to our library of courses for Finance Professionals. Course: Fixed Income Markets Learn the characteristics, analysis, and valuation of fixed income securities. This course provides a thorough understanding of fixed income markets and the analysis and valuation of fixed […]
All About Bonds, Bond Mutual Funds, and Bond ETFs – Book Review
Esme Faerber introduces Bonds in depth to the reader in her book – All About Bonds, Bond Mutual Funds and Bond ETFs. The book promises to help the reader diversify their bond portfolio by understanding it better. It also explains the impact of economic changes on the bond market. All About Bonds, Bond Mutual Funds […]
The Handbook of Municipal Bonds
The Handbook of Municipal Bonds compiled by Sylvan Feldstein and Frank Fabozzi is a trustworthy guide that will help you navigate the world of municipal bonds. A variety of authors have contributed to several chapters classified under broad sections. The sections include the sell side, compliance issues, fixed income analysis of municipal products, and the […]
Arbitrage-free Valuation Approach for Bonds
The simplest way to calculate the value of a bond is to take the cash flows of the bond till its maturity and then discount them by a single discount rate. The method is quick but not very accurate because the yield curve is not flat and the interest rates are different for different maturities. […]
Calculate the Value of a Zero-coupon Bond
Suppose you have a pure discount bond that will pay $1,000 five years from today. The bond discount rate is 12%. What is the appropriate price for this bond? Since there are no interim coupon payments, the value of the bond will simply be the present value of single payment at maturity.
Calculate the Value of a Coupon Paying Bond
The value of a coupon paying bond is calculated by discounting the future payments (coupon and principal) by an appropriate discount rate. Suppose you have a bond with a $1,000 face value that matures 1 year from today. The coupon rate is 12% and the bond makes semi-annual coupon payments of $60. The bond yield […]
Overview of Structured Notes
Structured securities are hybrid securities that integrate the features of a debt instruments and a derivative. The motive behind creating a structured security is to lower the borrowing costs as well as to appeal to an audience such as institutional investors who would otherwise have some restrictions on what kind of securities they can invest […]
What are Medium-term Notes
Medium term notes are another type of corporate debt security. One of their unique characteristic is that the notes are not sold all at once. Instead they are offered continuously to investors by an agent of the issuer. The notes are registered with the SEC under Rule 415 (the shelf registration rule), which gives a […]