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Fixed Income Analysis
Fixed income analysis is the process of determining the value of a debt security based on an assessment of its risk profile, which can include interest rate risk, risk of the issuer failing to repay the debt, market supply and demand for the security, call provisions and macroeconomic considerations affecting its value in the future. Based on such an analysis, a fixed income analyst tries to reach a conclusion as to whether to buy, sell, hold, hedge or avoid the particular security. Fixed income products are generally bonds: debt instruments requiring the issuer (i.e. the debtor or borrower) to repay the lender the amount borrowed (principal) plus interest over a specified period of time (coupon payments) until maturity. They are issued by government treasuries, government agencies, companies or international organizations. Calculating Value To determine the value of a fixed income security, the analyst must estimate the expected cash flows from the investment and the approp ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Interest Rate Risk
Interest rate risk is the risk that arises for bond owners from fluctuating interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...s. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market. The sensitivity depends on two things, the bond's time to maturity, and the coupon rate of the bond. Calculation Interest rate risk analysis is almost always based on simulating movements in one or more yield curves using the Heath-Jarrow-Morton framework to ensure that the yield curve movements are both consistent with current market yield curves and such that no riskless arbitrage is possible. The Heath-Jarrow-Morton framework was developed in the early 1991 by David Heath of Cornell University, Andrew Morton of Lehman ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Callable Bond
A callable bond (also called redeemable bond) is a type of bond ( debt security) that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity. In other words, on the call date(s), the issuer has the right, but not the obligation, to buy back the bonds from the bond holders at a defined call price. Technically speaking, the bonds are not really bought and held by the issuer but are instead cancelled immediately. The call price will usually exceed the par or issue price. In certain cases, mainly in the high-yield debt market, there can be a substantial call premium. Thus, the issuer has an option which it pays for by offering a higher coupon rate. If interest rates in the market have gone down by the time of the call date, the issuer will be able to refinance its debt at a cheaper level and so will be incentivized to call the bonds it originally issued. Another way to look at this interplay is tha ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Andrew Kalotay
Andrew Kalotay (born 1941) is a Hungarian-born finance professor, Wall Street quant and chess master. He is best known as an authority on fixed income valuation and institutional debt management. He is currently the President of Andrew Kalotay Associates, and an adjunct professor at Polytechnic Institute of New York University. His innovations include the concept of refunding efficiency — a widely used tool for managing callable debt, the ratchet bond — a surrogate for conventional callable bonds, and the volatility reduction measure — for testing hedge effectiveness. Kalotay has also made numerous contributions to the quantitative analysis of option-adjusted spread (OAS), interest rate derivatives, and mortgage-backed securities (MBS); he is an author of the Kalotay–Williams–Fabozzi model. In 1997, he was inducted into the Fixed Income Analysts Society's Hall of Fame. Kalotay emigrated to Canada following the 1956 Hungarian Revolution. He graduated from ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Yield Curve
In finance, the yield curve is a graph which depicts how the Yield to maturity, yields on debt instruments – such as bonds – vary as a function of their years remaining to Maturity (finance), maturity. Typically, the graph's horizontal or x-axis is a time line of months or years remaining to maturity, with the shortest maturity on the left and progressively longer time periods on the right. The vertical or y-axis depicts the annualized yield to maturity. Those who issue and trade in forms of debt, such as loans and bonds, use yield curves to determine their value. Shifts in the shape and slope of the yield curve are thought to be related to investor expectations for the economy and interest rates. Ronald Melicher and Merle Welshans have identified several characteristics of a properly constructed yield curve. It should be based on a set of securities which have differing lengths of time to maturity, and all yields should be calculated as of the same point in time. Al ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Swap (finance)
In finance, a swap is an agreement between two counterparty, counterparties to trade, exchange financial instruments, cashflows, or payments for a certain time. The instruments can be almost anything but most swaps involve cash based on a notional principal amount.Financial Industry Business Ontology Version 2 , Annex D: Derivatives, EDM Council, Inc., Object Management Group, Inc., 2019 The general swap can also be seen as a series of forward contracts through which two parties exchange financial instruments, resulting in a common series of exchange dates and two streams of instruments, the ''legs'' of the swap. The legs can be almost anything but usually one leg involves cash flows based on a notional principal amount that both parties agree to. This principal usu ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Prepayment Of Loan
Prepayment is the early repayment of a loan by a borrower, in part (commonly known as a curtailment) or in full, often as a result of optional refinancing to take advantage of lower interest rates.Lemke, Lins and Picard, ''Mortgage-Backed Securities'', Chapter 4 (Thomson West, 2013 ed.). In the case of a mortgage-backed security (MBS), prepayment is perceived as a financial risk—sometimes known as "call risk"—because mortgage loans are often paid off early in order to incur lower interest payments through cheaper refinancing. The new financing may be cheaper because the borrower's credit has improved or because market interest rates have fallen; but in either of these cases, the payments that ''would have been made'' to the MBS investor would be above current market rates. Redeeming such loans early through prepayment reduces the investor's upside from credit and interest rate variability in an MBS, and in essence forces the MBS investor to reinvest the proceeds at lower ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Preferred Stock
Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument. Preferred stocks are senior (i.e., higher ranking) to common stock but subordinate to bonds in terms of claim (or rights to their share of the assets of the company, given that such assets are payable to the returnee stock bond) and may have priority over common stock (ordinary shares) in the payment of dividends and upon liquidation. Terms of the preferred stock are described in the issuing company's articles of association or articles of incorporation. Like bonds, preferred stocks are rated by major credit rating agencies. Their ratings are generally lower than those of bonds, because preferred dividends do not carry the same guarantees as interest payments from bonds, and becau ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Mortgage Loan
A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "collateral (finance), secured" on the borrower's property through a process known as mortgage origination. This means that a Mortgage law, legal mechanism is put into place which allows the lender to take possession and sell the secured property ("foreclosure" or "repossession") to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word ''mortgage'' is derived from a Law French term used in Legal professions in England and Wales, Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken throu ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Interest Rate Risk
Interest rate risk is the risk that arises for bond owners from fluctuating interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...s. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market. The sensitivity depends on two things, the bond's time to maturity, and the coupon rate of the bond. Calculation Interest rate risk analysis is almost always based on simulating movements in one or more yield curves using the Heath-Jarrow-Morton framework to ensure that the yield curve movements are both consistent with current market yield curves and such that no riskless arbitrage is possible. The Heath-Jarrow-Morton framework was developed in the early 1991 by David Heath of Cornell University, Andrew Morton of Lehman ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Interest
In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct from a fee which the borrower may pay to the lender or some third party. It is also distinct from dividend which is paid by a company to its shareholders (owners) from its profit (economics), profit or Reserve (accounting), reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs. For example, a customer would usually pay interest to debt, borrow from a bank, so they pay the bank an amount which is more than the amount they borrowed; or a customer may earn interest on their savings, and so they may withdraw more than they originally deposited. In the case of savings, the customer is the lender, and the ban ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Hedge (finance)
A hedge is an investment Position (finance), position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance policy, insurance, forward contracts, swap (finance), swaps, option (finance), options, gambles, many types of Over-the-counter (finance), over-the-counter and Derivative (finance), derivative products, and futures contracts. Public futures markets were established in the 19th century to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of Energy derivative, energy, precious metals, foreign currency, and interest rate fluctuations. Etymology Hedging is the practice of taking a position in one market to offset and balance against the risk adopted by assuming a position in a contrary or opposing market o ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Floating Interest Rate
A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, Bond (finance), bond, mortgage loan, mortgage, or credit, that does not have a fixed interest, fixed rate of interest over the life of the instrument. Floating interest rates typically change based on a reference rate (a benchmark of any financial factor, such as the Consumer Price Index). One of the most common reference rates to use as the basis for applying floating interest rates is the Secure Overnight Financing Rate, or SOFR. The rate for such debt will usually be referred to as a Yield spread, spread or wikt:margin, margin over the base rate: for example, a five-year loan may be priced at the six-month SOFR + 2.50%. At the end of each six-month period, the rate for the following period will be based on the SOFR at that point (the reset date), plus the spread. The basis will be agreed between the borrower and lender, but 1, 3, 6 or 12 month money mar ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
