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1 ESSENTIALS OF BOND PRICING 1.1 Straight bond 1.2 Classification of bonds Length of coupon period. Size of coupon payments. Redemption date. Issuer of the bond. Currency denomination. Credit risk. 1.3 Fair pricing of straight bond Annual discounting of annual coupon payments. Properties of price-yield relationship. Valuation date is different from coupon payment date. Alternative pricing formulas. 1.4 Clean and dirty prices Division of coupon between bond seller and bond buyer. Analytical representation of dirty and clean price. 1.5 Yield to maturity Meaning of YTM. Shortcomings of YTM. 1.6 Other yield measures Holding-period yield. Current yield. Simple yield to maturity. Money market yield. 1.7 Price-maturity relationship 2 ANALYSIS OF YIELD CURVE 2.1 Zero yield curve Bootstrapping. Synthetization. 2.2 Implied forward yield curves Implied forward rates, Synthetic forward rates. Forward yield curves. Expectation hypothesis. 2.3 Pricing of floating rate notes Par property. Synthetic floater. 2.4 Inflation-linked bond Reasons of imperfect protection against inflation. Nominal and real yield to maturity. Break-even inflation. 2.5 Par yield curve Position property. 3 MEASURING INTEREST RATE RISK 3.1 Risks associated with holding bonds 3.2 Duration Macaulay duration. Modified duration. 3.3 Properties of Macaulay duration Limiting value. Measure of interest rate risk. Immunization property. Duration of a bond portfolio. 3.4 Convexity Convexity formula. Approximation property. Attractiveness of convexity. 4 MEASURING CREDIT RISK 4.1 Credit spread 4.2 Risk-neutral probabilities of default 4.3 Historical probabilities of default 5 MORTGAGES 5.1 Level-payment mortgage Annuity formula. Decomposition of instalment into interest payment and principal repayment. Payment calendar – annuity approach. Payment calendar – synthetic approach. 5.2 Prepayments Prepayment formula. Prepayment risk. 5.3 Inflation-linked mortgage Tilt and affordability problems. Graduated-payment mortgage. Other mortgage designs. 5.4 Foreign-currency mortgage 5.5 Securitization with mortgages Participants in securitization. Some securitization techniques. Pros and cons of securitization. 6 MONEY MARKET SECURITIES 6.1 Money market conventions Annual versus periodic interest rate. Simple return versus effective yield. Quotation on yield versus discount basis. Money market yield curve. 6.2 Certificate of deposit Holding-period yield. 6.3 Treasury bill Bond-equivalent yield. 6.4 Sale and repurchase agreement Legal versus economic treatment of repo. Other notions in repo transaction. Financing long position in bond market. Covering short position in bond market. Leveraging bond portfolio. Other uses of repo.