capital markets dr. ian giddy new york universitygiddy.org/sf/nibcapital/nib-bonds.pdfthese are...
TRANSCRIPT
Dr.
Ian
Gid
dy
New
Yor
k U
nive
rsity
Cap
ital M
arke
ts
NIB
C
3Copyright ©2006 Ian H Giddy
Cap
ital M
arke
tsC
apita
l Mar
kets
�D
ay 1
�T
he B
ond
Mar
kets
�M
ezza
nine
Fin
ance
�D
ay 2
�F
ixed
-Inc
ome
Der
ivat
ives
�S
truc
ture
d N
otes
�D
ay 3
�A
sset
-Bac
ked
Sec
uriti
es
�C
DO
san
d C
redi
t Der
ivat
ives
Dr.
Ian
Gid
dy
New
Yor
k U
nive
rsity
The
Bon
d M
arke
ts
NIB
Cap
ital
5Copyright ©2006 Ian H Giddy
The
Fix
edT
he F
ixed
-- Inc
ome
Mar
kets
Inco
me
Mar
kets
�T
reas
ury
bills
, not
es a
nd b
onds
�O
ther
gov
ernm
ents
and
tax-
exem
pts
�C
orpo
rate
bon
ds
�M
ortg
age-
back
ed s
ecur
ities
�E
urob
onds
and
fore
ign
gove
rnm
ent b
onds
�S
wap
s an
d ot
her
fixed
-inco
me
deriv
ativ
es
�S
truc
ture
d no
tes
How
can
we
mak
e se
nse
of a
ll th
ese?
6Copyright ©2006 Ian H Giddy
Ris
k-F
ree
Ass
et
Bon
dsR
eal E
stat
e
Con
Ed
Via
com
Cha
seS
iem
ens
Sec
urity
Sel
ectio
n
Sto
cks
Com
mod
ities
FX
Ass
et A
lloca
tion
Ris
ky A
sset
s
Cap
ital A
lloca
tion
Man
agin
g a
Por
tfolio
Man
agin
g a
Por
tfolio
7Copyright ©2006 Ian H Giddy
Fix
ed In
com
e M
arke
tsF
ixed
Inco
me
Mar
kets F
ixed
Inco
me
Fix
ed In
com
e
Mon
ey M
arke
tsM
oney
Mar
kets
Bon
dsB
onds
8Copyright ©2006 Ian H Giddy
Mon
ey M
arke
tsM
oney
Mar
kets
Sou
rce
: ft
.co
m
9Copyright ©2006 Ian H Giddy
The
Glo
bal M
oney
Mar
ket
The
Glo
bal M
oney
Mar
ket
Sou
rce
: ft
.co
m
10Copyright ©2006 Ian H Giddy
The
Bon
d M
arke
tT
he B
ond
Mar
ket
Mun
icip
al B
onds
Ass
et-B
acke
d S
ecur
ities
For
eign
Bon
ds
Eur
oyen
Bon
ds, e
tc.
Eur
obon
ds
Cor
pora
te B
onds
Gov
ernm
ent B
onds
Priv
ate
Pla
cem
ents
11Copyright ©2006 Ian H Giddy
Glo
bal M
arke
tG
loba
l Mar
ket
Source: imf.org, Global Financial Stability Report
12Copyright ©2006 Ian H Giddy
The
US
Bon
d M
arke
tT
he U
S B
ond
Mar
ket
Sou
rce
: b
on
dm
ark
ets
.co
m, R
ese
arc
h Q
ua
rte
rly
13Copyright ©2006 Ian H Giddy
Gov
ernm
ent B
onds
Gov
ernm
ent B
onds
Sou
rce
s: f
t.c
om
,
14Copyright ©2006 Ian H Giddy
Hig
h G
rade
Bon
dsH
igh
Gra
de B
onds
Sou
rce
s: f
t.c
om
,
15Copyright ©2006 Ian H Giddy
Mor
e B
onds
Mor
e B
onds So
urc
es:
ft.
co
m,
16Copyright ©2006 Ian H Giddy
US
Gov
ernm
ent B
ond
Mar
ket
US
Gov
ernm
ent B
ond
Mar
ket
Gov
ernm
ents
Gov
ernm
ents
Tre
asur
ies
Tre
asur
ies
Age
ncie
s,
Mor
tgag
e-ba
cked
S
ecur
ities
Age
ncie
s,
Mor
tgag
e-ba
cked
S
ecur
ities
17Copyright ©2006 Ian H Giddy
US
U
S T
reas
urys
Tre
asur
ysO
utst
andi
ngO
utst
andi
ng
$0
$500
$1,0
00
$1,5
00
$2,0
00
$2,5
00
Bill
s N
otes
Bon
dsIn
dexe
dD
ata
: D
ec
. 200
4,
US$ b
illio
ns
Sou
rce
: b
on
dm
ark
ets
.co
m
18Copyright ©2006 Ian H Giddy
Rat
es: U
SA
Rat
es: U
SA
Sou
rce
: b
on
dso
nlin
e.c
om
19Copyright ©2006 Ian H Giddy
Tre
asur
ysT
reas
urys
Rat
e6
Mat
urity
, Mo/
Yr
De
c 97
Bid
Ask
ed9
9:2
9 9
9:3
1A
sk Y
ld.
6.0
1
Tre
asu
ry N
otes
and
Bon
dsa
s qu
oted
in th
e W
all S
tree
t Jou
rnal
�U
S G
ov
ern
me
nt
bo
nd
s a
re q
uo
ted
in
32
nd
s
�Y
ield
is s
em
i-a
nn
ua
l yie
ld t
o m
atu
rity
20Copyright ©2006 Ian H Giddy
Tre
asur
ies
and
Str
ips
Tre
asur
ies
and
Str
ips
Mat
urity
, Mo/
Yr
Aug
05
Whe
n th
e si
ngle
cash
flo
w is
pai
d
Typ
eci
Mea
ns "
coup
on in
tere
st"
Bid
Ask
ed51
:21
51:2
6%
of 1
00P
rice
quot
atio
ns
Ask
Yld
.6.
65T
he y
ield
to m
atur
ityat
whi
ch P
V =
pri
ce
Tre
asur
y S
trip
sas
quo
ted
in th
e W
all S
tree
t Jou
rnal
�A
go
od
wa
y t
o v
alu
e a
Tre
asu
ry b
on
d,
or
an
y
oth
er
bo
nd
, is
to
se
e w
ha
t it w
ou
ld c
ost
to
c
on
stru
ct
a s
imila
r se
t o
f c
ash
flo
ws
�Fo
r e
xam
ple
, o
ne
ca
n c
on
stru
ct
a s
et
of
ca
sh
flo
ws
to m
atc
h t
ho
se o
f a
co
up
on
bo
nd
usi
ng
st
rips
-if
it’s
ch
ea
pe
r, t
he
bo
nd
ma
y b
e
ove
rpric
ed
.
21Copyright ©2006 Ian H Giddy
Bon
d Le
goB
ond
Lego
�T
o va
lue
this
bon
d, b
reak
it u
p in
to it
s co
mpo
nent
cas
h flo
ws
-e.
g.
1st c
oupo
n of
(5
3/4)
/2 in
Feb
199
6, a
nd s
o on
...�
The
n us
e ze
ro’s
to s
ee w
hat e
ach
is w
orth
, and
add
the
tota
l.
In g
ener
al, b
reak
ing
up a
sec
urity
into
its
com
pone
nt p
arts
is a
n ex
celle
nt p
ath
to v
alua
tion.
Rat
e6
Mat
urity
, Mo/
Yr
Dec
97
Bid
Ask
ed99
:29
99:3
1A
sk Y
ld.
6.01
A T
reas
ury
Not
eas
quo
ted
in th
e W
all S
tree
t Jo
urn
al M
onda
y, J
uly
24, 1
995
22Copyright ©2006 Ian H Giddy
US
Gov
ernm
ent S
pons
ored
Ent
erpr
ises
US
Gov
ernm
ent S
pons
ored
Ent
erpr
ises
�G
over
nmen
t-sp
onso
red
ente
rpris
es (
GS
Es)
are
fina
ncin
g en
titie
s cr
eate
d b
y C
ongr
ess
to fu
nd lo
ans
to c
erta
in g
roup
s of
bor
row
ers
such
as
hom
eow
ners
, far
mer
s an
d st
uden
ts. (
GS
Es
are
also
so
met
imes
ref
erre
d to
as
fede
ral a
genc
ies
or fe
dera
lly s
pons
ored
agen
cies
.)�
Stu
dent
Loa
n M
arke
ting
Ass
ocia
tion
(Sal
lie M
ae),
Fed
eral
Nat
iona
l M
ortg
age
Ass
ocia
tion
(Fan
nie
Mae
) an
d F
eder
al H
ome
Loan
M
ortg
age
Cor
pora
tion
(Fre
ddie
Mac
) ar
e pr
ivat
ely
owne
d co
rpor
atio
ns�
The
Fed
eral
Hom
e Lo
an B
anks
and
the
Fed
eral
Far
m C
redi
t B
anks
are
sys
tem
s co
mpr
isin
g re
gion
al b
anks
. �
All
GS
E d
ebt i
s sp
onso
red
but n
ot g
uara
ntee
d by
the
fede
ral
gove
rnm
ent
�G
over
nmen
t Age
ncie
s su
ch a
s G
over
nmen
t Nat
iona
l Mor
tgag
e A
ssoc
iatio
n (G
inni
eM
ae)
are
divi
sion
s of
the
gove
rnm
ent w
hose
se
curit
ies
are
back
ed b
y th
e fu
ll fa
ith a
nd c
redi
t of t
he U
nite
dS
tate
s.
23Copyright ©2006 Ian H Giddy
The
Bon
d M
arke
tT
he B
ond
Mar
ket
Mun
icip
al B
onds
Ass
et-B
acke
d S
ecur
ities
For
eign
Bon
ds
Eur
oyen
Bon
ds, e
tc.
Eur
o$bo
nds
Cor
pora
te B
onds
Gov
ernm
ent B
onds
Priv
ate
Pla
cem
ents
24Copyright ©2006 Ian H Giddy
The
Eur
opea
n M
arke
tT
he E
urop
ean
Mar
ket
Source: HSBC Market Update on absnet.net
25Copyright ©2006 Ian H Giddy
Ass
etA
sset
-- Bac
ked
Issu
ance
Gro
win
g F
aste
rB
acke
d Is
suan
ce G
row
ing
Fas
ter
Sou
rce
: b
on
dm
ark
ets
.co
m, R
ese
arc
h Q
ua
rte
rly
26Copyright ©2006 Ian H Giddy
In th
e U
SA
, Con
sum
er F
inan
ce D
omin
ates
In th
e U
SA
, Con
sum
er F
inan
ce D
omin
ates
Sou
rce
: b
on
dm
ark
ets
.co
m, R
ese
arc
h Q
ua
rte
rly
27Copyright ©2006 Ian H Giddy
The
Bon
d M
arke
tT
he B
ond
Mar
ket
Mun
icip
al B
onds
Mor
tgag
e-B
acke
d S
ecur
ities
For
eign
Bon
ds
Eur
oyen
Bon
ds, e
tc.
Eur
o$bo
nds
Cor
pora
te B
onds
US
Tre
asur
y B
onds
Priv
ate
Pla
cem
ents
28Copyright ©2006 Ian H Giddy
Inst
rum
ents
and
Mar
kets
Inst
rum
ents
and
Mar
kets
Cor
pora
te B
onds
Cor
pora
te B
onds
Dom
estic
Dom
estic
Inte
rnat
iona
lIn
tern
atio
nal
29Copyright ©2006 Ian H Giddy
US
Cor
pora
te B
ond
Mar
ket
US
Cor
pora
te B
ond
Mar
ket So
urc
e:
inve
stin
gin
bo
nd
s.c
om
30Copyright ©2006 Ian H Giddy
Cor
pora
te B
onds
Cor
pora
te B
onds
Lega
l Asp
ects
Of C
orpo
rate
Bon
ds�
A B
ond
Inde
ntur
eis
a c
ontr
act b
etw
een
the
borr
owin
g co
rpor
atio
n an
d th
e bo
ndho
lder
s, s
tatin
g th
e co
nditi
ons
unde
r w
hich
a b
ond
has
been
is
sued
�C
omm
on fe
atur
es o
f bon
d in
dent
ures
incl
ude:
�S
inki
ng-F
und
Req
uire
men
ts
�S
ecur
ity In
tere
st�
A T
rust
eeis
a th
ird p
arty
pai
d to
pro
tect
the
bond
hold
ers'
inte
rest
31Copyright ©2006 Ian H Giddy
Cor
pora
te B
ond
Yie
lds
Cor
pora
te B
ond
Yie
lds
Sou
rce
: im
f.o
rg, G
lob
al F
ina
nc
ial S
tab
ility
Re
po
rt
32Copyright ©2006 Ian H Giddy
Pro
visi
ons
of B
onds
Pro
visi
ons
of B
onds
�S
ecur
ed o
r un
secu
red
�C
all p
rovi
sion
�C
onve
rtib
le p
rovi
sion
�P
ut p
rovi
sion
(pu
tabl
ebo
nds)
�F
loat
ing
rate
bon
ds�
Sin
king
fund
s
33Copyright ©2006 Ian H Giddy
Pro
tect
ion
Aga
inst
Def
ault
Pro
tect
ion
Aga
inst
Def
ault
�S
inki
ng fu
nds
�S
ubor
dina
tion
of fu
ture
deb
t�
Div
iden
d re
stric
tions
�C
olla
tera
l
34Copyright ©2006 Ian H Giddy
Sec
ured
or
Uns
ecur
ed?
Sec
ured
or
Uns
ecur
ed?
�D
eben
ture
bon
ds
Mos
t cor
pora
te b
onds
are
deb
entu
res—
that
is, u
nsec
ured
de
bt o
blig
atio
ns b
acke
d on
ly b
y th
e is
suer
’s g
ener
al c
redi
t and
the
capa
city
of i
ts
cash
flow
to r
epay
inte
rest
and
prin
cipa
l. �
Mor
tgag
e bo
nds
The
se a
re b
onds
for
whi
ch r
eal e
stat
e or
oth
er p
hysi
cal
prop
erty
has
bee
n pl
edge
d as
col
late
ral.
The
y ar
e m
ostly
issu
ed b
y pu
blic
ut
ilitie
s. D
iffer
ent m
ortg
age
bond
s re
flect
the
prio
rity
of th
e lie
n, o
r le
gal c
laim
, on
e ha
s ag
ains
t the
spe
cifie
d pr
oper
ty. A
ny in
vest
or in
mor
tgag
ebo
nds
shou
ld
find
out h
ow m
uch
othe
r de
bt o
f the
issu
er is
sec
ured
by
the
sam
e co
llate
ral a
nd
whe
ther
the
lien
supp
ortin
g th
at o
ther
deb
t is
equa
l or
prio
r to
the
bond
’s li
en.
�C
olla
tera
l tru
st b
onds
A
cor
pora
tion
may
dep
osit
stoc
ks, b
onds
and
oth
er
secu
ritie
s w
ith a
trus
tee
to b
ack
its b
onds
. The
col
late
ral m
usth
ave
a m
arke
t va
lue
at th
e tim
e of
issu
ance
at l
east
equ
al to
the
valu
e of
the
bond
s.�
Equ
ipm
ent t
rust
cer
tific
ates
R
ailro
ads
and
airli
nes
have
issu
ed th
is ty
pe o
f bo
nd a
s a
way
to p
ay fo
r ne
w e
quip
men
t at r
elat
ivel
y lo
w in
tere
st r
ates
. The
title
to
the
equi
pmen
t is
held
by
a tr
uste
e un
til th
e lo
an is
pai
d of
f, an
d th
e in
vest
ors
who
buy
the
cert
ifica
tes
usua
lly h
ave
a fir
st c
laim
on
the
equi
pmen
t.�
Sub
ordi
nate
d de
bent
ures
D
ebt t
hat i
s su
bord
inat
ed, o
r ju
nior
, has
a p
riorit
y lo
wer
than
that
of o
ther
deb
t in
term
s of
pay
men
t (bu
t lik
e al
l bon
ds, i
t ran
ks
ahea
d of
sto
ck).
Onl
y af
ter
secu
red
bond
s an
d de
bent
ures
are
pai
d of
f can
ho
lder
s of
sub
ordi
nate
d de
bent
ures
be
paid
. �
Gua
rant
eed
bond
s A
noth
er fo
rm o
f sec
urity
is a
gua
rant
ee o
f one
cor
pora
tion’
s bo
nds
by a
noth
er c
orpo
ratio
n. F
or e
xam
ple,
bon
ds is
sued
by
a su
bsid
iary
may
be
gua
rant
eed
by th
e pa
rent
cor
pora
tion.
Gua
rant
eed
bond
s be
com
e, in
effe
ct,
debe
ntur
es o
f the
gua
rant
eein
g co
rpor
atio
n.So
urc
e:
inve
stin
gin
bo
nd
s.c
om
Dr.
Ian
Gid
dy
New
Yor
k U
nive
rsity
Bon
d P
ricin
g an
d D
urat
ion
NIB
Cap
ital
36Copyright ©2006 Ian H Giddy
Mon
ey M
arke
t Ins
trum
ents
Mon
ey M
arke
t Ins
trum
ents
�T
reas
ury
bills
�C
ertif
icat
es o
f dep
osit
�C
omm
erci
al P
aper
�B
anke
rs A
ccep
tanc
es�
Eur
odol
lars
�R
epur
chas
e A
gree
men
ts (
RP
s) a
nd R
ever
se R
Ps
�F
eder
al F
unds
37Copyright ©2006 Ian H Giddy
Bon
d F
unda
men
tals
Bon
d F
unda
men
tals
Som
e bo
nd ja
rgon
:�
Bill
s, n
otes
and
bon
ds
�P
ar v
alue
�C
oupo
n in
tere
st r
ate
�B
ond
pric
es a
nd “
quot
es”
�C
urre
nt y
ield
, yie
ld to
mat
urity
, yie
ld to
cal
l�
Dur
atio
n an
d co
nvex
ity
�A
nd m
any
mor
e: s
ee g
loss
ary
38Copyright ©2006 Ian H Giddy
Bon
d P
ricin
gB
ond
Pric
ing
�Se
llin
g a
t a
dis
co
un
tis
wh
en
a b
on
d s
ells
fo
r le
ss t
ha
n
its
pa
r va
lue
(i.e
., t
he
qu
ote
is <
100)
�Se
llin
g a
t p
rem
ium
is w
he
n a
bo
nd
se
lls f
or
mo
re
tha
n it
s p
ar
va
lue
(i.e
., t
he
qu
ote
is >
100)
10
0
9%P
ric
e o
f a
9
% b
on
d
39Copyright ©2006 Ian H Giddy
Pre
sent
Val
ues:
Rem
inde
rP
rese
nt V
alue
s: R
emin
der
Sin
gle
amou
nt:
the
amou
nt ti
mes
the
pres
ent v
alue
of i
nter
est
fact
or, o
r P
VIF
k,n
:
Ann
uity
:th
e pe
riodi
c pa
ymen
t tim
es th
epr
esen
t val
ue o
f an
nuity
fact
or, o
r P
VIF
Ak,
n:
PV
AP
MTx
PV
IFA
PM
Txk
kk
nk
n
n
,,
/()
==
−+
11
1
PV
FV
xPV
IFF
Vx
kk
nk
nn
,,
()
==
+1
1
40Copyright ©2006 Ian H Giddy
Pre
sent
Val
ue O
f A P
erpe
tuity
Pre
sent
Val
ue O
f A P
erpe
tuity
A p
erp
etu
ity is
an
an
nu
ity t
ha
t g
oe
s o
n
fore
ve
r...
an
d (
1/k
) is
th
e p
rese
nt
va
lue
inte
rest
fa
cto
r
for
a p
erp
etu
ity,
PV
IFA
1 kk
,∞=
PV
PM
Tk
∞=
41Copyright ©2006 Ian H Giddy
Bas
ic B
ond
Pric
ing
Bas
ic B
ond
Pric
ing
Tim
e
$1
,00
0
?$
10
0$
10
0$
10
0$
10
0
INTE
REST
PR
INC
IPA
L
The
fo
rmu
la f
or
a b
on
d’s
pric
e is
BI k
I kM
kn
01
21
11
=+
++
++
+(
)(
)..
.(
)
42Copyright ©2006 Ian H Giddy
Bas
ic B
ond
Val
uatio
nB
asic
Bon
d V
alua
tion
WH
ER
E:
Bo
= v
alue
of t
he b
ond
at ti
me
zero
I=
ann
ual b
ond
inte
rest
in d
olla
rs (
inte
rest
pay
men
t)M
= p
ar v
alue
of t
he b
ond
kd=
req
uire
d ra
te o
f ret
urn
n=
num
ber
of y
ears
to m
atur
ity
BIx
PV
IFA
Mx
PV
IF
BI k
Mk
kn
n
tn
tn
0
01
11
=+
=+
++
=∑
()
()
()
()
,
43Copyright ©2006 Ian H Giddy
Bon
d P
ricin
g E
xam
ple
Bon
d P
ricin
g E
xam
ple
A $
1,00
0 pa
r va
lue
US
Tre
asur
y bo
nd m
atur
es in
20
year
s an
d ha
s a
9%
coup
on in
tere
st r
ate.
If a
n in
vest
or's
req
uire
d ra
te o
f ret
urn
is 1
0%, w
hat i
s th
e va
lue
of th
e bo
nd?
Wha
t We
Kno
w:
M=
$1,
000;
I =
.09
x $1
,000
= $
90; n
= 2
0; k
d=
10%
Bo
= $
90 x
(P
VIF
A10
%,
20)
+ 1
,000
x (
PV
IF10
%,
20)
= $
90 x
(8.
514)
+ $
1,00
0 x
($14
9)
= $
766.
16 +
$14
9 =
$91
5.26
T
hus,
the
mos
t an
inve
stor
with
a 1
0% r
equi
red
retu
rn w
ould
pay
for
this
bon
d is
$91
5.26
, or
a qu
ote
of a
ppro
xim
atel
y 91
½.
45Copyright ©2006 Ian H Giddy
Sem
iann
ual I
nter
est a
nd B
ond
Val
ues
Sem
iann
ual I
nter
est a
nd B
ond
Val
ues
Sin
ce m
ost b
onds
pay
inte
rest
eve
ry s
ix m
onth
s, it
in
crea
ses
the
pres
ent v
alue
of t
he c
ash
flow
s an
d, th
us,
the
valu
e of
the
bond
.A
djus
t the
val
uatio
n fo
rmul
a as
follo
ws:
()
()
BP
VIF
AM
PV
IFk
nk
nd
d0
22
22
1 2=
+/
,/
,
46Copyright ©2006 Ian H Giddy
Val
ue o
f a S
emia
nnua
l Bon
dV
alue
of a
Sem
iann
ual B
ond
A $
1,00
0 pa
r bo
nd w
ith a
15%
cou
pon
and
15 y
ears
to m
atur
ity a
ndse
mia
nnua
l int
eres
t pay
men
ts is
bei
ng c
onsi
dere
d by
an
inve
stor
with
a
10%
req
uire
d re
turn
. H
ow m
uch
shou
ld h
e be
will
ing
to p
ay?
Bo
= $
150/
2 x
PV
IFA
10/
2, 2
X15
+ $
1,00
0 x
PV
IF 1
0/2
,2X
15
= $
75 x
(P
VIF
A5%
,30)
x
$1,0
00 x
(P
VIF
5%,3
0)
= $
75 (
15.3
73)
+ $
1,00
0 (.
231)
= $
1,38
3.98
47Copyright ©2006 Ian H Giddy
Cur
rent
Yie
ldC
urre
nt Y
ield
Giv
en a
$1,
000
par
valu
e bo
nd w
ith a
10%
cou
pon
rate
, cu
rren
tly q
uote
d at
96,
the
curr
ent y
ield
is
.10
x $1
,000
$100
.96
x $1
,000
$960
=
= 1
0.42
%
48Copyright ©2006 Ian H Giddy
Yie
ld H
as T
hree
Sou
rces
of R
etur
nY
ield
Has
Thr
ee S
ourc
es o
f Ret
urn
�C
ou
po
n
�C
ap
ita
l ga
in (
or
loss
), if
th
e p
rice
is n
ot
pa
r
�R
ein
ve
stm
en
t
To a
sse
ss b
on
ds,
va
lua
tio
n is
be
tte
r th
an
yie
ld
0102030405060708090100
Jul-
94Ju
l-95
Jul-
96Ju
l-97
A 1
0%
BO
ND
PR
ICED
AT
94
49Copyright ©2006 Ian H Giddy
The
Con
cept
of R
etur
nT
he C
once
pt o
f Ret
urn
�R
etur
n is
the
rate
that
you
ear
n on
you
r in
vest
men
t�
One
mea
sure
: Int
eres
t rat
e (o
r co
upon
) on
a
bond
, or
divi
dend
on
a st
ock
(10%
)�
Ano
ther
: cur
rent
yie
ld (I
nter
est o
r di
vide
nd
divi
ded
by p
rice)
Exa
mpl
e: 1
0%/9
4=10
.64%
�A
third
: rea
lint
eres
t rat
e (s
ubtr
act i
nfla
tion)
0102030405060708090100
Jul-
94Ju
l-95
Jul-
96Ju
l-97
A 1
0%
BO
ND
PR
ICED
AT
94
50Copyright ©2006 Ian H Giddy
The
Con
cept
of R
etur
nT
he C
once
pt o
f Ret
urn
�T
otal
ret
urn:
take
into
acc
ount
bo
th c
oupo
ns a
nd c
apita
l gai
n
�In
the
illus
trat
ion:
�10
% c
oupo
n
�6%
cap
ital g
ain
(abo
ut 2
%
per
annu
m)
�T
otal
ret
urn
appr
ox.
6%+
2%=
10%
0102030405060708090100
Jul-
94Ju
l-95
Jul-
96Ju
l-97
A 1
0%
BO
ND
PR
ICED
AT
94
51Copyright ©2006 Ian H Giddy
The
Yie
ldT
he Y
ield
�Y
ield
to m
atur
ity c
ombi
nes
coup
ons
and
capi
tal g
ains
-al
l cas
h flo
ws.
�T
he y
ield
to m
atur
ity o
n an
y bo
nd, i
s th
e ra
te th
at w
ill
mak
e th
e pr
esen
t val
ue o
f the
cas
h flo
ws
from
the
inve
stm
ent e
qual
to th
e pr
ice
of th
e in
vest
men
t.
52Copyright ©2006 Ian H Giddy
Pric
es a
nd Y
ield
s in
the
Wal
l Str
eet J
ourn
alP
rices
and
Yie
lds
in th
e W
all S
tree
t Jou
rnal
Rat
e M
at.
Mo/
yr
Bid
A
sked
C
hg
Ask
Y
ld
5 1/
8 5 ...
7
7/8
8 1/
2 ...
7
1/8
6 1/
4
May
04n
Ju
n 04
n F
eb 0
5-00
F
eb 1
0n
Feb
33
Aug
33
100:
01
100:
04
101:
14
107:
11
95:0
6 85
:21
100:
03
100:
06
101:
16
107:
13
95:0
8 85
:23
...
+1
+1
+7
+16
+14
2.44
3.
35
5.71
6.
92
7.53
7.
46
Mon
day,
May
16,
200
4
53Copyright ©2006 Ian H Giddy
Yie
ld T
o M
atur
ity (
YT
M)
Yie
ld T
o M
atur
ity (
YT
M)
�Y
TM
is th
e ra
te o
f ret
urn
inve
stor
s ea
rn if
the
y bu
y a
bond
at a
sp
ecifi
c pr
ice
and
hold
it u
ntil
mat
urity
�Y
TM
is a
lso
the
disc
ount
rat
e th
at c
ause
s th
e bo
nd’s
cur
rent
pric
e to
ju
st e
qual
the
pres
ent v
alue
of i
ts in
tere
st p
aym
ents
and
par
val
ue.
�F
ind
ysu
ch th
at L
HS
=R
HS
:
PC
yC
yM
yn
01
21
11
=+
++
++
+(
)(
)..
.(
)
54Copyright ©2006 Ian H Giddy
The
Yie
ld C
urve
The
Yie
ld C
urve
bond
sonl
ine.
com
55Copyright ©2006 Ian H Giddy
Yie
ld C
urve
sY
ield
Cur
ves
Yie
lds
Mat
urit
y
Upw
ard
Upw
ard
Slop
ing
Slop
ing
Dow
nwar
d D
ownw
ard
Slop
ing
Slop
ing
56Copyright ©2006 Ian H Giddy
The
orie
s of
Ter
m S
truc
ture
The
orie
s of
Ter
m S
truc
ture
�E
xpec
tatio
ns�
Liqu
idity
Pre
fere
nce
�U
pwar
d bi
as o
ver
expe
ctat
ions
�M
arke
t Seg
men
tatio
n �
Pre
ferr
ed H
abita
t
57Copyright ©2006 Ian H Giddy
Yie
ld H
as P
robl
ems
Yie
ld H
as P
robl
ems
�R
einv
estm
ent a
ssum
ptio
n: Y
TM
ass
umes
we
rein
vest
at
the
sam
e yi
eld.
�C
oupo
n ef
fect
: diff
eren
t bon
ds w
ith th
e sa
me
mat
urity
, al
l fai
rly p
riced
, hav
e di
ffere
nt y
ield
s.�
Cal
labl
e bo
nds
have
no
defin
ed m
atur
ity.
58Copyright ©2006 Ian H Giddy
Yie
ld o
f a Z
ero
Yie
ld o
f a Z
ero
�Z
ero-
coup
on b
onds
sim
ply
pay
the
prin
cipa
l at m
atur
ity,
no in
tere
st, s
o fin
d k
such
that
:
�E
xam
ple:
10-
year
US
Tre
asur
y ze
ro w
ith fa
ce v
alue
$1
,000
pric
ed a
t $39
9.85
: k=
9.60
%
BM
kn
01
=+
()
59Copyright ©2006 Ian H Giddy
Bet
ter
Bon
d P
ricin
gB
ette
r B
ond
Pric
ing
The
met
hod
used
pre
viou
sly
disc
ount
s al
l the
bon
d's
cash
flow
s at
a
sing
le r
ate,
the
yiel
d to
mat
urity
. B
ut a
s th
e yi
eld
curv
e sh
ows,
diff
eren
t yie
lds
appl
y to
diff
eren
t m
atur
ities
. The
bes
t wa
y to
look
at t
he y
ield
for
a pa
rtic
ular
mat
urity
is
to fi
nd o
ut th
e yi
eld
on a
zer
o-co
upon
bon
d fo
r th
at m
atur
ity.
The
n w
e ca
n fin
d th
e P
V o
f eac
h ca
sh fl
ow (
coup
ons
& p
rinci
pal)
by
disc
ount
ing
each
cas
h flo
w a
t the
cor
resp
ondi
ng z
ero-
coup
on r
ate.
(O
r, e
quiv
alen
tly, b
y m
ultip
lyin
g b
y th
e co
rres
pond
ing
disc
ount
fa
ctor
.)
60Copyright ©2006 Ian H Giddy
Bet
ter
Bon
d P
ricin
g B
ette
r B
ond
Pric
ing
So
we
need
to fi
nd o
ut th
e z'
s: th
e ze
ro-c
oupo
n bo
nd
yiel
ds. T
here
are
two
way
s of
doi
ng th
is.
Bon
d V
alue
=
1C
(1+
1z1 )
+
2C
(1+
2z2 )
+
3C
(1+
3z3 )
+ +
n
M
(1+
nzn )
•••
Let u
s ca
ll th
e ze
ro-c
oupo
n ra
te fo
r ea
ch m
atur
ity z
t. T
hen
the
valu
e of
a b
ond
shou
ld b
e th
e su
m o
f the
PV
sof
eac
h of
the
cash
flow
s.
61Copyright ©2006 Ian H Giddy
The
Zer
o A
ppro
ach
The
Zer
o A
ppro
ach
�U
se z
ero-
coup
on r
ates
to v
alue
eac
h ca
sh fl
ow -
then
ad
d th
em!
�W
here
can
we
get t
he z
’s?
One
pla
ce is
from
the
Tre
asur
y st
rip m
arke
t.
BC z
C zM z n
n0
1
1
2
21
11
=+
++
++
+(
)(
)..
.(
)
62Copyright ©2006 Ian H Giddy
Iden
tifyi
ng U
nder
valu
ed S
ecur
ities
Iden
tifyi
ng U
nder
valu
ed S
ecur
ities
Bon
dsB
onds
Spo
tR
ates
Spo
tR
ates “C
orre
ct”
pric
ing
“Cor
rect
”pr
icin
g Com
pare
with
act
ual
Com
pare
with
act
ual
63Copyright ©2006 Ian H Giddy
Unu
mU
num
�U
num
is c
onsi
derin
g re
stru
ctur
ing
its p
ortfo
lio fr
om c
oupo
n bo
nds
to z
ero-
coup
on b
onds
. The
y ow
n a
two-
year
mat
urity
US
Tre
asur
y bo
nd w
ith a
co
upon
rat
e of
12%
(pa
id a
nnua
lly).
Bas
ed o
n th
e cu
rren
t mar
ket p
rice,
the
yiel
d to
mat
urity
is 5
.8%
.�
The
yie
ld o
n a
1-ye
ar m
atur
ity z
ero-
coup
on o
ndis
5%
, and
on
a 2-
year
m
atur
ity z
ero-
coup
on b
ond
is 6
%.
�W
hat a
rbitr
age
oppo
rtun
ity is
ava
ilabl
e?�
Wha
t is
the
prof
it?�
Wha
t are
the
risks
, if a
ny?
(bas
ed o
n C
h 14
, pro
b16
)
64Copyright ©2006 Ian H Giddy
Unu
mU
num
�B
ased
on
the
YT
M, t
he p
rice
of th
e bo
nd is
:
120
PV
IFA
(5.8
%,2
) +
100
0 P
VIF
(5.8
%,2
) =
$11
13.9
9
�B
ased
on
the
spot
cur
ve, t
he p
rice
of th
e sa
me
bond
is:
120/
(1.0
5) +
112
0/(1
.06)
2=
$11
11.0
8
�T
here
fore
, the
arb
itrag
e st
rate
gy
is to
buy
zer
os w
ith fa
ce v
alue
s of
12
0 an
d 11
20 a
nd r
espe
ctiv
e m
atur
ities
of o
ne a
nd tw
o ye
ars,
and
sim
ulta
neou
sly
sell
coup
on b
onds
. The
pro
fit e
qual
s $2
.91
on e
ach
bond
.
(bas
ed o
n C
h 14
, pro
b16
)
65Copyright ©2006 Ian H Giddy
Str
uctu
re o
f the
US
MB
S M
arke
tS
truc
ture
of t
he U
S M
BS
Mar
ket
Mor
tgag
e Lo
anB
ank
(mor
tgag
e or
igin
ator
) m
akes
a w
hole
loan
Anc
illar
y: b
roke
rs, s
ervi
cers
, ins
urer
s
Mor
tgag
e Lo
anB
ank
(mor
tgag
e or
igin
ator
) m
akes
a w
hole
loan
Anc
illar
y: b
roke
rs, s
ervi
cers
, ins
urer
s
Mor
tgag
e P
ass-
Thr
ough
FN
MA
or
GM
AC
(co
ndui
t) p
ools
mor
tgag
e lo
ans
with
sim
ilar
char
acte
ristic
s
Mor
tgag
e P
ass-
Thr
ough
FN
MA
or
GM
AC
(co
ndui
t) p
ools
mor
tgag
e lo
ans
with
sim
ilar
char
acte
ristic
s
CM
O o
r R
EM
ICT
akes
a m
ortg
age
pool
and
mak
es th
e ca
sh fl
ows
mor
e pr
edic
tabl
e by
ass
igni
ngpr
iorit
y of
cla
ims
to th
e ca
sh fl
ows
CM
O o
r R
EM
ICT
akes
a m
ortg
age
pool
and
mak
es th
e ca
sh fl
ows
mor
e pr
edic
tabl
e by
ass
igni
ngpr
iorit
y of
cla
ims
to th
e ca
sh fl
ows
MB
S P
ortfo
lioIn
stitu
tiona
l inv
esto
r ev
alua
tes
risk/
retu
rn
beha
vior
of m
ortg
age-
back
ed s
ecur
ities
thro
ugh
optio
n-ad
just
ed p
rice
and
spre
ad a
naly
sis
MB
S P
ortfo
lioIn
stitu
tiona
l inv
esto
r ev
alua
tes
risk/
retu
rn
beha
vior
of m
ortg
age-
back
ed s
ecur
ities
thro
ugh
optio
n-ad
just
ed p
rice
and
spre
ad a
naly
sis
Mor
tgag
e S
trip
sIn
tere
st-O
nly
and
Prin
cipa
l-Onl
y
Mor
tgag
e S
trip
sIn
tere
st-O
nly
and
Prin
cipa
l-Onl
y
66Copyright ©2006 Ian H Giddy
Typ
ical
MB
ST
ypic
al M
BS
67Copyright ©2006 Ian H Giddy
Mor
tgag
e P
repa
ymen
tsM
ortg
age
Pre
paym
ents
Com
plex
ity o
f the
opt
ion
-�
Sys
tem
atic
ris
k: e
xerc
ise
of th
e in
tere
st r
ate
optio
n�
Uns
yste
mat
ic r
isk:
re
ason
s un
rela
ted
to
mor
tgag
e in
tere
st r
ates
(e
g de
mog
raph
ic)
68Copyright ©2006 Ian H Giddy
The
Neg
ativ
e C
onve
xity
of M
BS
The
Neg
ativ
e C
onve
xity
of M
BS
Sec
uriti
es b
acke
d by
fixe
d-ra
te m
ortg
ages
hav
e "n
egat
ive
conv
exity
." T
his
refe
rs to
the
fact
that
whe
n in
tere
st r
ates
ris
e, th
e M
BS
beh
ave
like
long
-ter
m b
onds
(th
eir
pric
es
fall
stee
ply)
; but
whe
n ra
tes
fall,
thei
r pr
ices
ris
e sl
owly
or
not a
t all.
Pric
e
Yie
ld
Pric
e-yi
eld
curv
e of
20
year
bon
d ca
llabl
e in
3ye
ars
20-y
ear
3-ye
ar
Cal
labl
e bo
nd
69Copyright ©2006 Ian H Giddy
Con
vexi
ty o
f C
onve
xity
of
Cal
labl
esC
alla
bles
Mo
rtg
ag
e-b
ac
ked
se
cu
ritie
s a
nd
oth
er
ca
llab
le
bo
nd
s m
ay h
ave
ne
ga
tive
co
nve
xity
wh
ich
c
ush
ion
s a
bo
nd
’s p
rice
ris
e a
nd
ac
ce
lera
tes
its
fall!
PR
ICE
YIE
LD
10
0
10
2
70Copyright ©2006 Ian H Giddy
Dur
atio
nD
urat
ion
Dur
atio
n m
easu
res
the
% p
rice
chan
ge fo
r a
give
n ch
ange
in
yie
ld:
PR
ICE
YIE
LD9
%
10
0
The
ste
ep
er
the
lin
e, th
e m
ore
th
e p
rice
fa
lls
for
a g
ive
n r
ise
in
yie
ld
71Copyright ©2006 Ian H Giddy
Gre
ater
Dur
atio
n, G
reat
er R
isk
Gre
ater
Dur
atio
n, G
reat
er R
isk
Dur
atio
n is
mea
sure
d as
the
PV
-wei
ghte
d av
erag
e lif
e, s
o lo
w-c
oupo
n bo
nds
have
gre
ater
dur
atio
n
PR
ICE
YIE
LD9
%
10
0
6%
BO
ND
9%
BO
ND
0%
BO
ND
72Copyright ©2006 Ian H Giddy
Cal
cula
ting
Dur
atio
n:C
alcu
latin
g D
urat
ion:
Mac
Cau
ley
Mac
Cau
ley
and
Mod
ified
and
Mod
ified
D
tCF
rP
DP
dP P
D
r
MA
C
tt
tn
MO
D
=+
==
=−
+
=∑(
)
%(
)
1
1
1
∆
73Copyright ©2006 Ian H Giddy
Bon
d P
rice
Cha
nges
:B
ond
Pric
e C
hang
es:
Act
ual v
s. D
urat
ion
Act
ual v
s. D
urat
ion
-- Bas
edB
ased
The
re’s
an
erro
r in
dur
atio
n-ba
sed
estim
atio
n,
beca
use
dura
tion
is li
near
.
PR
ICE
YIE
LD9
%
10
0A
ctu
al
Du
rati
on
Err
or
74Copyright ©2006 Ian H Giddy
Bon
d P
rice
Cha
nges
:B
ond
Pric
e C
hang
es:
Act
ual v
s. D
urat
ion
Act
ual v
s. D
urat
ion
-- Bas
edB
ased
The
re’s
an
erro
r in
dur
atio
n-ba
sed
estim
atio
n,
beca
use
dura
tion
is li
near
.
PR
ICE
YIE
LD9
%
10
0A
ctu
al
Du
rati
on
Err
or
75Copyright ©2006 Ian H Giddy
Con
vexi
ty:
Con
vexi
ty:
The
Cha
nge
in D
urat
ion
The
Cha
nge
in D
urat
ion
The
per
cent
age
pric
e ch
ange
in a
bon
d ca
n be
app
orix
imat
edus
ing
both
dur
atio
n an
d co
nvex
ity.
PR
ICE
YIE
LD9
%
10
0
76Copyright ©2006 Ian H Giddy
Con
vexi
ty fo
rC
onve
xity
for
Diff
eren
t Bon
dsD
iffer
ent B
onds
Pos
itive
con
vexi
ty is
des
irabl
e, b
ecau
se it
cu
shio
ns a
bon
d’s
pric
e fa
ll an
d ac
cele
rate
s its
ris
e.
PR
ICE
YIE
LD9
%
10
0
Bo
nd
A
Bo
nd
A
Du
rati
on
lin
e
Dr.
Ian
Gid
dy
New
Yor
k U
nive
rsity
Cre
dit R
isk
and
Rat
ings
NIB
Cap
ital
78Copyright ©2006 Ian H Giddy
Def
ault
Ris
k an
d R
atin
gsD
efau
lt R
isk
and
Rat
ings
�R
atin
g co
mpa
nies
�M
oody
’s In
vest
or
Ser
vice
�S
tand
ard
& P
oor’s
�F
itch
�R
atin
g C
ateg
orie
s�
Inve
stm
ent g
rade
�S
pecu
lativ
e gr
ade
79Copyright ©2006 Ian H Giddy
Bon
d C
redi
t Rat
ings
Bon
d C
redi
t Rat
ings
Moo
dy’s
Sta
ndar
d &
Poo
r’sIn
terp
reta
tion
Aaa
Aa
AA
AA
AH
igh-
qual
ity d
ebt i
nstr
umen
ts
A Baa
A BB
BS
tron
g to
ade
quat
e ab
ility
topa
y pr
inci
pal a
nd in
tere
st
Ba
B Caa
Ca
C
BB
B CC
CC
CC
Abi
lity
to p
ay in
tere
st a
ndpr
inci
pal s
pecu
lativ
e
DIn
def
ault
80Copyright ©2006 Ian H Giddy
Inve
stm
ent G
rade
or
Spe
cula
tive?
Inve
stm
ent G
rade
or
Spe
cula
tive?
81Copyright ©2006 Ian H Giddy
Inte
rpre
tatio
n of
Cre
dit R
atin
gsIn
terp
reta
tion
of C
redi
t Rat
ings
Rat
ing
(Moo
dy’s
) D
escr
iptio
n In
vest
men
t Gra
de
A
aa
Bon
ds w
hich
are
judg
ed to
be
of th
e be
st q
ualit
y. T
hey
carr
y th
e sm
alle
st d
egre
e of
inve
stm
ent r
isk
and
are
gene
rally
refe
rred
to a
s "t
op ra
ted,
" “pr
ime
rate
d” o
r “gi
lt-ed
ged.
” Int
eres
t pay
men
ts a
re
prot
ecte
d by
a la
rge
or a
n ex
cept
iona
lly s
tabl
e m
argi
n an
d pr
inci
pal i
s se
cure
. Whi
le th
e va
rious
pro
tect
ive
elem
ents
are
like
ly to
cha
nge,
su
ch c
hang
es a
s ca
n be
vis
ualiz
ed a
re m
ost u
nlik
ely
to im
pair
the
fund
amen
tally
stro
ng p
ositi
on o
f suc
h is
sues
. A
a B
onds
whi
ch a
re ju
dged
to b
e of
hig
h qu
ality
by
all s
tand
ards
. To
geth
er w
ith th
e A
aa g
roup
they
com
pris
e w
hat a
re g
ener
ally
kno
wn
as h
igh
grad
e bo
nds.
The
y ar
e ra
ted
low
er th
an th
e be
st b
onds
be
caus
e m
argi
ns o
f pro
tect
ion
may
not
be
as la
rge
as in
Aaa
se
curit
ies
or fl
uctu
atio
n of
pro
tect
ive
elem
ents
may
be
of g
reat
er
ampl
itude
or t
here
may
be
othe
r ele
men
ts p
rese
nt w
hich
mak
e th
e lo
ng-te
rm ri
sk a
ppea
r som
ewha
t lar
ger t
han
the
Aaa
sec
uriti
es
A
Bon
ds w
hich
pos
sess
man
y fa
vora
ble
inve
stm
ent a
ttrib
utes
and
are
co
nsid
ered
as
uppe
r-m
ediu
m-g
rade
obl
igat
ions
. Fac
tors
giv
ing
secu
rity
to p
rinci
pal a
nd in
tere
st a
re c
onsi
dere
d ad
equa
te, b
ut
elem
ents
may
be
pres
ent w
hich
sug
gest
a s
usce
ptib
ility
to im
pairm
ent
som
e tim
e in
the
futu
re.
Baa
B
onds
whi
ch a
re c
onsi
dere
d as
med
ium
-gra
de o
blig
atio
ns (i
.e.,
they
ar
e ne
ither
hig
hly
prot
ecte
d no
t poo
rly s
ecur
ed).
Inte
rest
pay
men
ts
and
prin
cipa
l sec
urity
app
ear a
dequ
ate
for t
he p
rese
nt b
ut c
erta
in
prot
ectiv
e el
emen
ts m
ay b
e la
ckin
g or
may
be
char
acte
ristic
ally
un
relia
ble
over
any
gre
at le
ngth
of t
ime.
Suc
h bo
nds
lack
out
stan
ding
in
vest
men
t cha
ract
eris
tics.
S
pecu
lativ
e G
rade
Ba
Bon
ds w
hich
are
judg
ed to
hav
e sp
ecul
ativ
e el
emen
ts; t
heir
futu
re
cann
ot b
e co
nsid
ered
as
wel
l-ass
ured
. Ofte
n th
e pr
otec
tion
of in
tere
st
and
prin
cipa
l pay
men
ts m
ay b
e ve
ry m
oder
ate,
and
ther
eby
not w
ell
safe
guar
ded
durin
g bo
th g
ood
and
bad
times
ove
r the
futu
re.
Unc
erta
inty
of p
ositi
on c
hara
cter
izes
bon
ds in
this
cla
ss.
B
Bon
ds w
hich
gen
eral
ly la
ck c
hara
cter
istic
s of
the
desi
rabl
e in
vest
men
t. A
ssur
ance
of i
nter
est a
nd p
rinci
pal p
aym
ents
and
mai
nten
ance
of
othe
r ter
ms
of th
e co
ntra
ct o
ver a
ny lo
ng p
erio
d of
tim
e m
ay b
e sm
all.
Caa
B
onds
whi
ch a
re o
f poo
r sta
ndin
g. S
uch
issu
es m
ay b
e in
def
ault
or
ther
e m
ay b
e pr
esen
t ele
men
ts o
f dan
ger w
ith re
spec
t to
prin
cipa
l or
inte
rest
. C
a B
onds
whi
ch re
pres
ent o
blig
atio
ns w
hich
are
spe
cula
tive
in a
hig
h de
gree
. Suc
h is
sues
are
ofte
n in
def
ault
or h
ave
othe
r mar
ked
shor
tcom
ings
. C
B
onds
whi
ch a
re th
e lo
wes
t rat
ed c
lass
of b
onds
, and
issu
es s
o ra
ted
can
be re
gard
ed a
s ha
ving
ext
rem
ely
poor
pro
spec
ts o
f eve
r atta
inin
g an
y re
al in
vest
men
t sta
ndin
g.
D
Bon
ds w
hich
are
in d
efau
lt (S
&P a
nd F
itch
ratin
gs).
Sou
rce
: m
oo
dys.
co
m
82Copyright ©2006 Ian H Giddy
Def
ault
Mat
rixD
efau
lt M
atrix
Sou
rce:
Fitc
h, “
Ban
k C
LOs”
83Copyright ©2006 Ian H Giddy
Fac
tors
Use
d by
Rat
ing
Com
pani
esF
acto
rs U
sed
by R
atin
g C
ompa
nies
�C
over
age
ratio
s�
Leve
rage
rat
ios
�Li
quid
ity r
atio
s�
Pro
fitab
ility
rat
ios
�C
ash
flow
to d
ebt
84Copyright ©2006 Ian H Giddy
Rat
ings
and
Spr
eads
Rat
ings
and
Spr
eads
Source: bondsonline.com
85Copyright ©2006 Ian H Giddy
The
Bon
d M
arke
tsT
he B
ond
Mar
kets
�M
arke
ts a
nd In
stru
men
ts�
The
Str
uctu
re o
f Rat
es�
Inte
rest
Rat
e R
isk
and
Dur
atio
n�
Cre
dit R
isk,
Rat
ings
and
Cre
dit S
prea
ds
86Copyright ©2006 Ian H Giddy