Wall Street Prep
Debt and Fixed Income Crash Course
I. Intro
a. Demand comes from governments (lots of expenditure, when you have
deficit start
... [Show More] borrowing), corporations, and households
b. Fixed income securities: financial instruments that require borrower pay a
pre-determined amount to the holder of the security in exchange for capital
upfront
i. Refers to debt with fixed or variable debt (changes in LIBOR!), other
instruments
c. Debt is a significantly larger component of the capital markets than equity
i. Equity is silo-ed for corporations, but governments + households have
debt too
d. Types of debt:
i. Bonds: actively traded financial instruments,
1. used by governments primarily
ii. Loans: lender holds loan that’s not tradeable (unless securitized, ie.
MBS)
1. Used by households mostly
iii. Corporations do both
e. Geographical breakdown: U.S. has heavy weight toward issuing corporate
bonds
i. U.S. dominates debt market, accounts for 40% of global debt, EM has
14%
II. Bond basics (math)
a. Types of bonds
i. Bullet bond: conventional/vanilla bond, typical structure where bond
pays out incremental interest payments and principal return at the end
then you basically do
trial and error to find ‘y’ or use Excel’s =RATE() function
1. =RATE(# periods, coupon rate * FV, -PV, FV)
2. =PV(target rate, # periods, couon rate * FV, FV)
3. reinvestment assumption: assumes that the interest payments
you receive will be reinvested coupons at the yield, assumes
every single cash flow is reinvested at the y the model spits out
4. used in corporate and longer term government bonds
ii. Zero-coupon bond: bond that pays no coupon, but price at end
embeds interest payments ,
1. Used in short term government bonds, ie. T-Bill, money market
instruments
iii. Annuity bond: commingles interest and principal to create even
payments every period –
1.
2. FV=0, coupon rate=0
3. Also assumes reinvestments at the yield of annuity payments
4. Used in mortgages and insurance and retirement products
iv. Notes: bonds with shorter maturities usually, depending on type f note
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1. ie. corporate bonds with 20 year can be a note, but U [Show Less]