MAF202 Lecture Notes - Lecture 1: Call Option, Interest Rate Swap, Put Option
Document Summary
Fixed income security = a financial obligation of an entity that promises to pay a specified sum of money at specified future dates. (term to maturity, principal, par value, coupon). Interest rates play a role in determining their prices. Product issued by corporate and govt. entities to raise capital to finance their operations and projects. The borrower, or issuer, promises to pay interest (called the coupon) on an annual or semi- annual basis until a set date. The issuer returns the principal amount (called the face or par value) to the investor at the maturity date. Investment grade bonds = stable, low-risk companies with lower interest rates (returns: non-investment grade (junk bonds) = high yield high risk, municipal bond = issued by govt. state or national to fund capital projects. Backed by full faith and credit of the govt. therefore very low risk, and low return.
