Ass#23-PortfolioManager.ppt

Ass #2/3 - PortfolioManager PortfolioMangaer Interest Rates - Pricing a Bond Interest Rates - Relative Pricing It depends on what other investments are available. Assume only other investment is a US T-Bill returning 7% each half-year. Interest Rates - Pricing the First Coupon Interest Rates - Adding More Realism Actually, T-Bills are priced by the market like anything else. There are alternative investments at all sorts of maturities out to 30 years. Interest Rates - The Spot Zero Curve Interest Rates - Units Discount Factors converts future dollars to present dollars Can express equivalently as interest rates which are considerably more intuitive. Interest Rates - Compounded Units Interest Rates - Daycount Basis Interest Rates - Years in Daycount of Bond Interest Rates - Converting using Daycount Interest Rates - Same Rate, Different Units YTM annualised rates, semi-annually compounded, ACT/360 daycount 13.793% annualised rates, semi-annually compounded, ACT/365 daycount 13.991% annualised rates, semi-annually compounded, ACT/ACT daycount 13.999% annualised rates, annually compounded, ACT/ACT daycount 14.489% annualised rates, daily compounded, ACT/365 daycount 13.526% annualised rates, continuously compounded, ACT/365 daycount 13.523% Interest Rates - Continuous Compounding Interest Rates - Bond Pricing w/ a Zero Curve Bond pricing using a “real” spot zero curve Interest Rates - Parity Each distinct currency has its own zero curve. No reason borrowing in USD should be the same rate as borrowing in CAD. Interest Rates - Parity This leads to a relationship between the CAD-USD spot fx rate, the USD 1yr. spot IR rate, the CAD 1yr. spot IR rate, the CAD-USD 1yr. forward fx rate. If this relationship is broken, arbitrageurs working at large banks will trade and make instantaneous risk-free profits. Forces of supply and demand will force the prices back into alignment. Interest Rates - Parity Interest Rates - IR Parity Arbitrage Say 1yr. future