Bond crash/course: Swap spreads

When we abruptly stopped last time, we had just finished figuring out the Present Value of the variable side of the swap I offered you:

PV of variable side = 1 – P(tN)

…where tN is the time of the final payment at the swap’s maturity, and P(t) is the discount factor derived from […]

Bond crash/course: Swap pricing

Once again, I need to talk about something else before I discuss swap spreads. I could skip over this, but the details are actually somewhat interesting. And the math below is not as bad as it looks. Really.

To understand swap spreads, we need to understand a little bit about swap pricing. So here we […]

Bond crash/course: LIBOR

I had planned to write about swap spreads, but it turns out I need to discuss something else first.

In my post on credit spreads, I wrote:

Since the Treasury has perfect credit, yields on Treasuries capture every concern of the bond market — opportunity costs, inflation risks, etc. — except for credit. All of […]

Bond crash/course: Swaps

Suppose I own a bond that promises to make certain interest payments. Suppose you own a bond with the same face value and maturity. Want to trade?

This is the basic idea behind the interest rate swap. The question only makes sense, of course, if the interest promised by our respective bonds is different. Maybe […]

Bond crash/course: Yield curve

More elementary school. But late elementary school, so there might be errors below. Let me know…

As mentioned in the previous post, Treasury yields provide the foundation from which all others are derived. (Well, for dollar-denominated bonds, anyway.) Consequently, these yields are very important, which is why they are the first thing that show up […]

Bond crash/course: Credit spreads

I need a break from the math, so let’s head back to elementary school.

As mentioned in the intro post, how much you would pay for a bond depends on many factors, and they can get complicated. So we simplify things by considering pairs of bonds that differ in only one aspect, and then looking […]

Bond crash/course: Price, Yield, Duration

As mentioned in the intro post, if you have a zero-coupon bond with face value F maturing in N years and trading today at price P, to determine the yield you have to solve this equation for y:

F = P*(1+y)^N

But remember that bond traders always think in terms of yield, not price. They would […]

Bond crash. Course.

I have decided I need to educate myself about bonds, with the goal of understanding what the h*ll John Jansen is talking about more often. I have a hunch this will be important, and possibly soon. We shall see how far I get.

I will hold myself up for ridicule by keeping my notes here […]