Learning objectives
By the end you can:
- Read a bond term sheet or offer document and extract the fourteen fields that determine every subsequent calculation, naming the clause each one comes from.
- Build the cash-flow table for a fixed, step-up, deferred, payment-in-kind, floating or index-linked structure, and state for each one where the issuer's cash strain sits.
- Compute an index ratio, an inflation-adjusted principal and a real coupon across a stated inflation path, and apply the deflation floor to the right quantity at the right date.
- Set a floating-rate note's coupon from a reference rate and a quoted margin, compute the discount margin implied by a market price, and state the two conditions under which its price equals par.
- Compute an accrual fraction under 30/360, actual/actual and actual/360 on the same pair of dates, and say in rupees or dollars what the choice is worth on a stated position.
- Decompose a settlement amount into full price, accrued interest and flat price, and explain why the market quotes the flat price and settles the full one.
- Matrix-price a new or illiquid issue by interpolating a comparable-bond yield matrix across rating and maturity, and state the comparability assumptions the answer rests on.
- Allocate a sovereign auction under both a uniform-price and a multiple-price rule, computing the stop-out, the pro-rata fill, the weighted-average accepted price and the proceeds difference between the two rules on the same bid book.
- Describe how corporate debt reaches investors through underwritten, best-efforts, private-placement and shelf routes in India and the United States, and say who bears which risk in each.
- Price the liquidity of a secondary market: convert a bid-ask into a round-trip cost, into basis points of yield, and into the holding period an off-the-run concession must survive to pay for itself.
Prerequisites & connections
Builds on. M0.02 gave you the map of who issues securities and who buys them, and this node fills in the debt half of that map with the actual mechanics. M1.08 gave you liabilities and financing from the issuer's books, including effective-interest amortisation, which is the accounting mirror of every accretion schedule below. M3.01 gave you time value of money, and nothing here needs more mathematics than that: every price in the node is a discounted cash flow, and the difficulty is entirely in knowing which cash flows and on which dates.
Feeds forward. FI1.01 takes the instruments described here and prices them off a discount curve, and owns the whole yield family including the four money-market yield conventions this node deliberately stops short of. FI1.02 takes the same cash flows and measures their rate sensitivity. FI1.03 takes the sovereign issues described here and bootstraps a curve out of them. FI1.04 takes the contingency provisions read off a document here and values them on a tree. FI1.06 (Fixed-Income Portfolio Management I: Liability-Driven and Index-Based) builds portfolios out of these instruments against a liability schedule or a benchmark, and FI1.07 (Active Fixed Income: Yield-Curve and Credit Strategies) trades them; both assume you can already read what you are holding. E11.01 supplies the credit opinion that decides which row of the matrix an issuer belongs in.
The non-overlaps are deliberate and worth stating field by field. FI1.01 owns pricing off a discount curve, yield to maturity, yield to call, yield to worst, the total-return decomposition and the four money-market yield measures (bank discount, holding period, add-on and bond-equivalent), so this node describes money-market instruments as contracts and hands the conversion chain forward untouched. FI1.02 owns duration, convexity and DV01; where a duration appears below it is an input borrowed to price liquidity, never a thing being taught. FI1.03 owns bootstrapping, spot and forward rates and swap spreads. FI1.04 owns the valuation of every embedded option: this node reads call schedules, put schedules, sinking funds and make-whole clauses off the document and computes their contractual cash amounts, and stops exactly where option value begins. E11.01 owns covenants, ratings methodology and recovery analysis. MS1.03 owns repo, the collateral chain and money-market plumbing. FI1.06 owns liability-driven and index-based mandates; FI1.07 owns active curve and credit strategies, including the carry-and-roll-down arithmetic that turns a liquidity concession into a position.