Financial Markets & Instruments || practical part understanding

money market

a market of short-term financial instruments for which time to maturity is lower than one year

money market instruments

certificates of deposit, treasury/commercial bills, promissory notes, interbank deposits

time to maturity

the number of years during which the issuer will have obligations to the financial instrument holder

maturity date

the time after which the debt becomes due and the capital must be repaid

face value

the value which the issuer of the financial instruments is obligated to pay to the holder at the time of maturity

issue value

the price at which the financial instruments are sold by the issuer in the primary market

market value

the price that must be paid for the the financial instrument on the secondary market

certificates of deposit

They are most often sold at a price equal to the face value from which interest is calculated. On the date of the maturity the holder recieves FV + interest.

r

rate of return

FV

face value

i

interest rate

Nim

the number of days between the issue date and the maturity date

P

price of the instrument

Npm

the number of days between the date of purchase and the maturity date

rp

market rate of return at the time of purchase

rs

market rate of return at the time of sale

Nsm

the number of days between the date of sale and the maturity date

treasury bills

Financial instruments with a discount basis. Treasury bills are sold at a price lower than the face value, which their holders receive on the date of maturity.

d

discount rate

bond

it is a debt instrument whose issuer commits to the buyer to pay interest and to redeem bonds at a face value at a maturity date

n

number of years to maturity

zero-coupon bonds

bonds from which interest is not paid and the owner's income is the difference between the face value and the selling price

coupon bonds

bonds from which interest is paid and which are taken out at face value

prepetual bonds

bonds that are not taken out and their holder receives interest indefinitely

YTM

yield to maturity, it is the annual income rate of the investor who buys the bonds and holds them until maturity

np

the number of years between the purchase date and the maturity date

ns

the number of years between the sale date and the maturity date

Ct

cashflow from bond

t

the period in which the payment of interest takes place

m

the number of interest payments during the year

I

the value of interest

NPV

net present value

An

future value of an annuity

rre

reinvestment rate

RCY

realized compound yield

FCF

future value of total positive cash flows from bonds

bond’s duration

It is a measure of the risk of a price change used to compare bonds of different maturities and interest rates. The higher the duration value, the greater the risk of a bond.

D

bond’s duration

P0

price of bond before the change of rate of return

P1

price of bond after the change of rate of return

wi

weight of individual bonds in the portfolio

MD

modified duration, it determines the approximate percentage change in the price of a bond due to a change in the rate of return by 1 percentage point