BU283 Study Guide - Midterm Guide: Reinvestment Risk, Credit Risk, Spot Contract
Document Summary
Fixed income securities: a fixed income security is one that pays income to an investor on a constant basis. Includes bonds, assets backed securities and some forms of preferred: bonds are a form of debt for the issuers. Issuer borrows money from bond investors and agrees to pay it back: many types of bonds, zero-coupon: t-(cid:271)ills, (cid:272)o(cid:373)(cid:373)er(cid:272)ial paper, a(cid:374)d (cid:271)a(cid:374)ker"s a(cid:272)(cid:272)epta(cid:374)(cid:272)es, sold at a discount from face value and redeemed at face value, coupon bonds. Inflation: real interest rates, expectations, maturity preference, default risk, monetary policy. Real vs. nominal rates: real rate of interest, the rate that would prevail if there was no inflation, nominal rate of interest, the observed rate of interest. If inflation is zero, then the real rate equals the nominal rate. Forward rates: a fixed income investor with a 2 year time horizon has essentially 2 options, lock in for 2 years with a 2 year bond. Invest for 1 year in a 1 year bond.
