2. Financial Instruments (2.1-2.2)

Buffl

5.Bank Management

by Noemy C.

Leaning Objectives And Agenda

2.1 Bond Markets

What Types of financial markets and securities are there??

Securities= Wertpapiere wie Stocks, bonds, derivatives

2.1 Bond Markets

What types of fixed income securities are there?

Es gibt 7 Stück

Mortgage= Hypothek

2.1 Bond Markets

Characteristics of fixed income securities

5 Stück

2.1 Bond Markets

Bond prices

what prices are there
How can we calculate a coupon

2.1 Bond Markets

Day count conventions

why necessary??
What are the most common conventions??

2.1 Bond Markets

Bond prices and yields

what is a bond price
A bond yield
A par yield

2.1 Bond markets

Par, discount and premium bonds

what is the Formular (Formel)?
What are the different relations between the markets

2.2 The term Structure of Interest Rates

Theorems on bond prices

What are the Rules about how bond prices react when the interest rates change??

Malkiel (1962) 1-5, Homer/Liebowitz (1972):

Rules about how bond prices react when interest rates (yields) change

2.2

Economic functions of interest rates

What are the functions of interest rates??

2.2

Types of interest rates

what types of interest rates are there ?

Treasury rate

Interest rate paid on government bonds; usually considered risk-free because governments are assumed not to default in their own currency.

Government bond(Staatsanleihe)= A debt security issued by a national government to borrow money from investors.
Risk-free= A financial asset with (almost) no chance of default; used as benchmark for pricing.

EURIBOR (European Interbank Offered Rate)

The interest rate at which European banks lend money to each other for short periods (e.g., 1m, 3m, 6m, 12m) m for months.

Quote (bank quote)= A price or interest rate that a bank offers in the market.
Not risk-free= An asset or interest rate that includes credit risk because the borrower could default.
Opportunity cost of capital= The return you could earn by using money in the next-best alternative investment.

ARR (Alternative Reference Rates)

New benchmark interest rates (e.g., SOFR, €STR, SARON) designed to be more reliable and less risky than old rates like LIBOR.

SOFR / €STR / SARON / SONIA / TONA=
Risk-free overnight interest rates used in the US (SOFR), Eurozone (€STR), Switzerland (SARON), UK (SONIA), and Japan (TONA).
Overnight rate= An interest rate for lending money for one day.
Credit risk= The risk that a borrower will not repay debt.
Transaction-based= Calculated using actual trades in the market, not estimates or opinions.

Zero rate (zero-coupon rate)

Interest rate comes from a zero-coupon bond, which pays only one cash flow at maturity.

Zero-coupon bond= A bond that pays no coupon and only repays the face value at maturity.
Face value / Par value= The amount that will be repaid at maturity (usually 100 or 1,000).

2.2

Compounding frequency

is it important to look at compounding frequency

Linear interest ( simple interest): no compounding, you earn interest only on the initial amount
Discrete compounding: interest is added at fixed intervals( Bsp: yearly), you earn interest only on the previous interest
Continuous compounding: interest is added all the time, this gives the highest result, because it compounds constantly

2.2

Spot rates