Lecture Overview:

• Fixed income securities

• Bond pricing basics

• Price government bonds

• Default risk

• Price corporate bonds

• Yields

• CDS

• Fixed Income Securities

  • Also called debt securities
  • Promise a fixed stream of income (CFs) to the investors
  • Issued are traded in bond markets

• Bonds

  • Most common fixed income securities
  • Government bonds
  • Corporate bonds
  • International bonds

• Other types of fixed income securities also include

  • Asset/Mortgage backed securities (ABC and MBS)
  • Money market securities
  • Sometimes also preferred shares

  The fixed income securities market size is > Stock market size

• Stock market and corporate bond market are very segmented
• So as the contents in textbooks
• More integrated in recent years

Bond Pricing Basics

Bond is a security issued under a borrowing arrangement

• The issuer (borrower) agrees to make specified payments to the bondholders (creditors) on specific dates