Coupons income

At first blush, the yield to maturity appears to be an informative measure of a bond s potential return. It considers not only the coupon income but any capital gain or loss that will be realized by holding the bond to maturity. The yield to maturity recognizes the timing of the cash flows. It also considers the third source of euro return that we dis-... 

Future price x Price factor + Accrued interest at delivery + Coupon income) (- Long gilt clean price + Accrued interest at purchase + Financing cost)... 

There is, of course, a more rigorous way of identifying the CTD bond. The method, which takes into account coupon income, gross basis, and the cost of financing the position over the holding period yields a net or value basis figure and is calculated using... 

Net basis = Coupon income - Gross basis - Financing cost (16.9)... 

Calculation of the coupon income is the difference between the accrued interest bought in at the time of purchasing the cash market bond subtracted from the accrued interest received when the bond is sold. Market conventions play an important role here, for example How many days between trade and settlement How many days in a month How many days in a year In the United Kingdom the market convention is actual number of days in a month and a 365 days in a year. In Germany the convention is actual number of days in month and 360 days in a year. 

Coupon income is defined as follows. From July 4, 2002, the date of the last coupon payment, until the settlement date, September 12, 2002, there are 71 days of accrued interest. Based on a coupon of 5.00% per annum and a 360-day year this amounts to 0.986. ... 

If the futures contract is held until 10 December 2002, a total of 159 days will have elapsed since the last coupon payment. This period will generate interest to the value of 2.208. The coupon income will be 2.208 -0.986 = 1.222. 

Net basis = Gross basis - Coupon income + Financing cost (16.10)... 

The risk of an investment in securities is often defined as the volatility of prices or returns. The return is measured here as the sum of coupon income and price gains. From an investor s viewpoint it would be advantageous to hold a portfolio of securities the returns of which correlate as little as possible. In real life investors therefore try to keep correlations between securities in their portfolios as low as possible. Correlations for the database from 6/80 to 11/02 are all positive. They range from 0.66 (Treasury 10 year+ and BBB 1-3 years) to 0.99 (A 3-7 years and AA 3-7 years). ... 

In this equation the percentage for C is not expressed as a decimal. Current yield ignores any capital gain or loss that might arise from holding and trading a bond and does not consider the time value of money. It calculates the coupon income as a proportion of the price paid for the bond. For this to be an accurate representation of return, the bond would have to be more like an annuity than a fixed-term instrument. 

For an investor, holding convertible bonds provides an ability to participate in the fortunes of the company without having to have a direct equity holding. The bondholder has a fixed coupon income stream, together with... 

Different methods exist for valuing convertibles. Generally, the most accurate are those employing an embedded option approach, which views the value of each component as being interdependent on the others. Unlike a plain vanilla equity option, the act of exercising the option does not require additional payment. This is why it is not really accurate to call the conversion share price the strike or exercise price. The investor forgoes part or all expected coupon income as the price for holding this option. 

Incorrect/incom- Review material of construction requirements vs. patible materials existing equipment before changing service of construction, corrosion coupons during pilot/develop-used in transfer- ment/scale-up ring/charging line or equipment. CCPS G-23... 

If changes have been made to the process (e.g. if incoming water quality cannot be maintained or other uncertainties arise concerning the corrosion behavior of the construction materials) it is possible to incorporate coupons or probes of the material into the plant and monitor their corrosion behavior. This approach may be used to assist in the materials selection process for a replacement plant. Small coupons (typically, 25 x 50 mm) of any material may be suspended in the process stream and removed at intervals for weight loss determination and visual inspection for localized corrosion. Electrical resistance probes comprise short strands for the appropriate material electrically isolated from the item of plant. An electrical connection from each end of the probe is fed out of the plant to a control box. The box senses the electrical resistance of the probe. The probe s resistance rises as its cross-sectional area is lost through corrosion. 

The discount rate is a weighted average cost of capital (WACC) and takes into account the capital structure of firms, cost of equity and debt, and income taxes. The capital structure of firms is assumed to be 30% equity and 70% debt. The cost of equity capital is 10%, the cost of debt is 7%, and the effective income tax rate is 39%. The debt instrument is assumed to be a 20 year, 7% coupon bond. The calculation of the discount rate is... 

In this thesis we derived new methods for the pricing of fixed income derivatives, especially for zero-coupon bond options (caps/floor) and coupon bond options (swaptions). These options are the most widely traded interest rate derivatives. In general caps/floors can be seen as a portfolio of zero-coupon bond options, whereas a swaption effectively equals an option on a coupon bond (see chapter (2)). The market of these LIBOR-based interest rate derivatives is tremendous (more than 10 trillion USD in notional value) and therefore accurate and efficient pricing methods are of enormous practical importance. 

To obtain the price of an inflation-linked bond, it is necessary to determine the value of coupon payments and principal repayment. Inflation-linked bonds can be structured with a different cash flow indexation. As noted above, duration, tax treatment and reinvestment risk, are the main factors that affect the instrument design. For instance, index-aimuity bmids that give to the investor a fixed annuity payment and a variable element to compensate the inflation have the shortest duration and the highest reinvestment risk of aU inflation-linked bonds. Conversely, inflation-linked zero-coupon bonds have the highest duration of all inflation-linked bonds and do not have reinvestment risk. In addition, also the tax treatment affects the cash flow structure. In some bond markets, the inflation adjustment on the principal is treated as current income for tax purpose, while in other markets it is not. 

Sundaresan, S., 2009. Fixed Income Markets and Their Derivates, third ed. Elsevier, Burlington. Waggoner, D., 1997. Spline methods for extracting interest rate curves from coupon bond prices. 

Dhillon, U., Lasser, D., 1998. Term premium estimates from zero-coupon bonds new evidence on the expectations hypothesis. J. Fixed Income 8, 52-58. 

Step-up callable notes are a particular type of structured fixed income products. These bonds offer a coupon payment that increase during the bond s life. Moreover, they include a call option, that as we discussed earlier, the issuer has the right to redeem the bond early. The question, whether a callable step-up note will be called or not always depends on the evolution of interests rates. Therefore, the inclusion of these two characteristics makes the bond attractive to investors with higher performance than a conventional bond. The added variable coupon element acts for an investor as cushion compared to a conventional callable bond. In fact, the increasing coupon payment increases the value of a callable bond. However, if interest rates go down and coupon payments increase, the incentive of the issuer to redeem the bond early is greater than a simple callable. 

The cash flows of a fixed-income security can be denominated in any currency. For bonds issued by countries within the European Union, the issuer typically makes both coupon payments and maturity value payments in euros. However, there is nothing that prohibits the issuer from making payments in other currencies. The bond s indenture can specify that the issuer may make payments in some other specified currency. There are some issues whose coupon payments are in one currency and whose maturity value is in another currency. An issue with this feature is called a dual-currency issue. 

Cash flow is simply the cash that is expected to be received in the future from owning a financial asset. For a fixed-income security, it does not matter whether the cash flow is interest income or repayment of principal. A security s cash flows represent the sum of each period s expected cash flow. Even if we disregard default, the cash flows for some fixed-income securities are simple to forecast accurately. Noncallable benchmark government securities possess this feature since they have known cash flows. For benchmark government securities, the cash flows consist of the coupon interest payments every year up to and including the maturity date and the principal repayment at the maturity date. 

Income earned from reinvestment of the bond s interim cash flows (i.e., coupon payments and principal repayments). 

The source of dollar return called reinvestment income represents the interest earned from reinvesting the bond s interim cash flows (interest and/or principal payments) until the bond is removed from the investor s portfolio. With the exception of zero-coupon bonds, fixed income securities deliver coupon payments that can be reinvested. Moreover, amortizing securities (e.g., mortgage-backed and asset-backed securities) make periodic principal repayments which can also be invested. 

Thus the coupon payments and reinvestment income together are 159,194.49. The reinvestment income alone is 9,193.26, which is found by subtracting the total coupon payments ( 159,193,26 - 150,000). This number matches the reinvestment income (labeled as Interest 2.975% ) presented in the yield analysis screen in Exhibit 3.9. 

The following illnstration demonstrates this. In what follows, the analysis will be cast in terms of euros. Be sure to keep in mind the distinction between total future euros which are equal to all euros that the bond investor expects to receive (including the recovery of the principal) and the total euro return which is equal to the euros the investor expects to realize from the three sonrces of return, namely, coupon payments, capital gain/loss, and reinvestment income. 

Let us partition the total dollar return for this bond into its three components coupon payments, capital gain/loss, and reinvestment income. The coupon payments contribute 70 of the total euro return. The capital gain/loss component is zero because the bond is purchased at par and held to maturity. Lastly, the remainder of the total euro return ( 26.72) must be due to reinvestment income. 

To verify this, this par bond s total euro return of 96.72 is driven by two sources of euro return coupon payments and reinvestment income. Recall from the beginning of the chapter, the reinvestment income can be determined using the future value of an ordinary annuity formula. Accordingly, the future value of 10 annual payments of 7 to be received plus the interest earned by investing the payments at 7% compounded annually is found as follows ... 

There are two characteristics of a bond that affect the degree of reinvestment risk. First, for a given yield to maturity and a given nonzero coupon rate, the longer the maturity the more the bond s total return is dependent on reinvestment income to realize the yield to maturity at the time of purchase. The implication is that the yield to maturity measure for long-term coupon bonds tells us little about the potential return an investor may real-... 

For both Globaldrive B and PPAFl the first layer of protection is excess spread in the transaction, which is the difference between (1) the income received from the pool of receivables, and (2) the coupon due under the notes/payments due to the swap counterparty plus a certain servicing fee. Excess spread that is not used to cover losses on the loans within a certain period is returned to the originator (i.e., excess spread benefits the transaction on a use it or lose it basis). 

Swaptions are options that allow the buyer to obtain at a future time one position in a swap contract. It is quite elementary that an interest rate swap, fixed for floating, can be understood as a portfolio of bonds.To consider this assume that the notional principal is 1. Then the claim on the fixed payments is the same as a bond paying coupons with the rate p and no principal. Let X be the time when the swap is conceived. The claim on the fixed income stream is worth, at time X,... 

Robert Litterman and Jose Scheinkman, Common Factors Affecting Bond Returns, Journal of Fixed Income (June 1991), pp. 54- 1. US (1984—88)—Spot Zero-Coupon (ZC) 6M-18Y 3 88.04/8.38/1.97... 

Bonds are debt instruments that represent cash flows payable during a specified time period. They are essentially loans. The cash flows they represent are the interest payments on the loan and the loan redemption. Unlike commercial bank loans, however, bonds are tradable in a secondary market. Bonds are commonly referred to 3S fixed-income instruments. This term goes back to a time when bonds paid fixed coupons each year. That is... 

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