This article does not cite any references or sources. (October 2007) Please help improve this article by adding citations to reliable sources. Unverifiable material may be challenged and removed.

Financial markets

Bond market Fixed income Corporate bond Government bond Municipal bond Bond valuation High-yield debt Image File history File links Question_book-3. ... This article does not cite any references or sources. ... Download high resolution version (480x640, 110 KB)Blockade in front of NYSE. Picture taken in April 2004. ... The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. ... This article does not cite any references or sources. ... A corporate bond is a bond issued by a corporation. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... In the United States, a municipal bond or muni is a bond issued by a state, city or other local government, or their agencies. ... In finance, a high yield bond (non-investment grade bond, speculative grade bond or junk bond) is a bond that is rated below investment grade at the time of purchase. ...

Stock market Stock Preferred stock Common stock Stock exchange A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... For other uses, see Stock (disambiguation). ... Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than common stock, and its terms are negotiated between the corporation and the investor. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...

Foreign exchange market Retail forex The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... In financial markets, the retail forex (retail currency trading or retail FX) market is a subset of the larger foreign exchange market. ...

Derivative market Credit derivative Hybrid security Options Futures Forwards Swaps A derivatives market is any market for a derivative security, that is a contract which specifies the right or obligation to receive or deliver future cash flows based on some future event such as the price of an independent security or the performance of an index. ... // A credit derivative is a financial instrument or derivative (finance) whose price and value derives from the creditworthiness of the obligations of a third party, which is isolated and traded. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... In finance options are types of derivative contracts, including call options and put options, where the future payoffs to the buyer and seller of the contract are determined by the price of another security, such as a common stock. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ... For the Thoroughbred horse racing champion, see: Swaps (horse). ...

Other Markets Commodity market OTC market Real estate market Spot market Chicago Board of Trade Futures market Commodity markets are markets where raw or primary products are exchanged. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Template:The Spot Market The Spot Market or Cash Marketis a commodities or securities market in which goods are sold for cash and delivered immediately. ...

Finance series Financial market Financial market participants Corporate finance Personal finance Public finance Banks and Banking Financial regulation Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... This article does not cite any references or sources. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... This article does not cite any references or sources. ... For other uses, see Bank (disambiguation). ... Financial supervision is government supervision of financial institutions by regulators. ...

v • d • e

Bond valuation is the process of determining the fair price of a bond. As with any security or capital investment, the fair value of a bond is the present value of the stream of cash flows it is expected to generate. Hence, the price or value of a bond is determined by discounting the bond's expected cash flows to the present using the appropriate discount rate. Definition Fair value, also called fair price, is a concept used in finance and economics. ... For alternative meanings, see bond (a disambiguation page). ... The present value of a single or multiple future payments (known as cash flows) is the nominal amounts of money to change hands at some future date, discounted to account for the time value of money, and other factors such as investment risk. ... Discount rate as used in finance and economics is distinct from the discount rate described below; please refer to discounting and discounts. ...

General relationships

The present value relationship

The fair price of a straight bond (a bond with no embedded option; see Callable bond) is determined by discounting the expected cash flows: For alternative meanings, see bond (a disambiguation page). ... In finance options are types of derivative contracts, including call options and put options, where the future payoffs to the buyer and seller of the contract are determined by the price of another security, such as a common stock. ... A callable bond or redeemable bond is a bond that can be redeemed by the issuer prior to its maturity. ...

• Cash flows:
  • the periodic coupon payments C, each of which is made once every period;
  • the par or face value F, which is payable at maturity of the bond after T periods.(NB final year payment will include the par value plus the coupon payment for the year)

• Discount rate: the required (annually compounded) yield or rate of return r.
  • r is the market interest rate for new bond issues with similar risk ratings

Bond Price =

Because the price is the present value of the cash flows, there is an inverse relationship between price and discount rate: the higher the discount rate the lower the value of the bond (and vice versa). A bond trading below its face value is trading at a discount, a bond trading above its face value is at a premium.

Coupon yield

The coupon yield is simply the coupon payment (C) as a percentage of the face value (F). In finance, coupons are attached to bonds, either physically, as with old bonds (with a stapler), or electronically. ...

Coupon yield = C / F

Coupon yield is also called nominal yield.

Current yield

The current yield is simply the coupon payment (C) as a percentage of the bond price (P). This article or section does not cite its references or sources. ...

Current yield = C / P₀.

Yield to Maturity

The yield to maturity (YTM) is the discount rate which returns the market price of the bond. It is thus the internal rate of return of an investment in the bond made at the observed price. YTM can also be used to price a bond, where it is used as the required return on the bond. Yield to maturity (YTM) is the yield promised by the bondholder on the assumption that the bond will be held to maturity, that all coupon and principal payments will be made and coupon payments are reinvested at the bonds promised yield at the same rate as invested. ... Market price is an economic concept with commonplace familiarity; it is the price that a good or service is offered at, or will fetch, in the marketplace; it is of interest mainly in the study of microeconomics. ... The internal rate of return (IRR) is a capital budgeting method used by firms to decide whether they should make long-term investments. ...

Solve for YTM where

Market Price =

gobloggggg

To achieve a return equal to YTM, the bond owner must:

• reinvest each coupon received at this rate,
• hold the bond until maturity, and
• redeem the bond at par.

The concept of current yield is closely related to other bond concepts, including yield to maturity, and coupon yield. The relationship between yield to maturity and coupon rate is as follows:

• When a bond sells at a discount, YTM > current yield > coupon yield.
• When a bond sells at a premium, coupon yield > current yield > YTM.
• When a bond sells at par, YTM = current yield = coupon yield.

The YTM is of limited use in valuing bonds with uncertain cash flows, such as mortgage-backed securities or asset-backed securities. In these instances, other measures such as option adjusted spread should be used instead when comparing yields across different types of bonds. In finance, a mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. ... An asset-backed security is a type of bond or note that is based on pools of assets, or collateralized by the cash flows from a specified pool of underlying assets. ... Option adjusted spread (OAS) is the flat spread over the treasury yield curve required to discount a mortgage-backed securitys volatile coupon payments to match its market price. ...

Bond pricing

Relative price approach

Here the bond will be priced relative to a benchmark, usually a government security. The discount rate used to value the bond is determined based on the bond's rating relative to a government security with similar maturity or duration. The better the quality of the bond, the smaller the spread between its required return and the YTM of the benchmark. This required return is then used to discount the bond cash flows as above. In finance, duration is the weighted average maturity of a bonds cash flows or of any series of linked cash flows. ...

Arbitrage free pricing approach

In this approach, the bond price will reflect its arbitrage free price (arbitrage=practice of taking advantage of a state of imbalance between two or more markets). Here, each cash flow is priced separately and is discounted at the same rate as the corresponding government issue Zero coupon bond. (Some multiple of the bond (or the security) will produce an identical cash flow to the government security (or the bond in question).) Since each bond cash flow is known with certainty, the bond price today must be equal to the sum of each of its cash flows discounted at the corresponding risk free rate - i.e. the corresponding government security. Were this not the case, arbitrage would be possible - see rational pricing. In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. ... Zero coupon bonds are bonds which do not pay periodic coupons, or so-called interest payments. ... The risk-free interest rate is the interest rate that it is assumed can be obtained by investing in financial instruments with no risk. ... Rational pricing is the assumption in financial economics that asset prices (and hence asset pricing models) will reflect the arbitrage-free price of the asset as any deviation from this price will be arbitraged away. This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to...

Here the discount rate per cash flow, r_t, must match that of the corresponding zero coupon bond's rate.

Bond Price =

See also

• Bond duration
• Bond convexity
• Option adjusted spread

In finance, duration is the weighted average maturity of a bonds cash flows or of any series of linked cash flows. ... This article does not cite any references or sources. ... Option adjusted spread (OAS) is the flat spread over the treasury yield curve required to discount a mortgage-backed securitys volatile coupon payments to match its market price. ...

External links

Discussion

• Bond Price Volatility Investment Analysts Society of South Africa
• Duration and convexity Investment Analysts Society of South Africa
• Course material Fixed Income Analytics