frm工行总行培训材料4 valuation and risk models.pdf

frm工行总行培训材料4_valuation_and_risk_modelsBruce Tuckman, Fixed Income Securities, 2nd Edition (Hoboken, NJ:
John Wiley & Sons, 2002)
Chapter 1 – Bond Prices, Discount Factors, and Arbitrage

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AIM 1: Describe and contrast individual and market expressions of the time
value of money.
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DETERMINING THE CASH FLOWS
Coupons are often stated in annual terms and must be adjusted for periodicity. Once
the cash flows are determined, the present value (PV) of the cash flows can be
computed.

FOUNDAMENTALS OF BOND VALUATION
The value (or price) of any financial assets – such as a bond – can be determined by
summing the asset’s discounted cash flows. There are three steps in the bond
valuation process:
 Estimate the cash flow. For a bond, there are two types of cash flows: (1) the
annual or semiannual coupon payments and (2) the recovery of principal at
maturity, or when the bond is retired.
 Determine the appropriate discount rate. The approximate discount rate is
either the bond’s yield to maturity (TYM) or a series of spot rates.
 Calculate the PV of the estimated cash flows.

In this topic, the concentration is on bonds that pay coupons semiannually in even
6-month from settlement.

PRICE QUOTATIONS
 Bonds are quoted on a percentage basis relative to a par value.
 Treasury notes and bonds use a “32nds” convention.
 A “+” in the quote indicates a half tick.
 Corporate and municipal bonds are quoted in eighths.



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DISCOUNT FACTORS
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AIM 2: Define discount factor and use a discount function to compute present