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Created with Fabric.js 1.4.5 FIXED INCOME MARKET The market for the trading of securities paying a guaranteed yield. Examples of fixed-income securities include bonds and preferred stock. The fixed-income market is lower risk and lower return than the variable income market. (also known as the credit, or fixed income market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures.  THE BOND MARKET PRESENT VALUE The concept is based on thecommon sense notion that adollar is less valuable to you thana dollar paid to you today.The term present value (PV) can be extended to mean the PVof a single cash flow or the sum of a sequence or group of cash flows. 4 Basic Types of Credit Instrumentsw/c incorporate present value concepts: simpleloan fixedpaymentloan discount bond couponbond PRESENT VALUE TERMS: SIMPLE LOAN TERMS Loan principal the amount of funds the lender provides to the borrower. Maturity date the date the loan must be repaid; the Loan term is from initiation to maturity date. Interest payment the cash amount that the borrower must pay the lender for the use of the loan principal. Simple interest rate the interest payment divided by the loan principal; the percentage of principal that must be paid as interest to the lender. Present Value Concept: Fixed-Payment Loan Terms Simple Loans require payment of one amountwhich equals the loan principal plus the interest. Fixed-Payment Loans loans where the loan principal and interest are repaid in several payments, often monthly, in equal dollar amounts over the loan term. Installment Loans such as auto loans and home mortgages are frequently of the fixed-payment type. Relationship Between Price and Yield to Maturity Its also straight-forward to show that the value of a bond (price) and yield to maturity (YTM) are negatively related. If i increases,the PV of any given cash flow is lower; hence, the price of the bond must be lower. Current Yield (CY) It is just an approximation for YTM easier to calculate. However, we should be aware of its properties:1. If a bonds price is near par and has a long maturity, thenCY is a good approximation.2. A change in the current yield always signals change inSame direction as yield to maturity. Risks of Fixed Income Investing 1. Interest Rate RiskIf interest rates rise, bond prices usually decline. If interest rates decline, however, bond prices usually increase, which means an investor can sometimes sell a bond for more than face value. 2. Credit RiskBonds carry the risk of default, which means that the issuer is unable to make further income and/or principal payments. 3. Inflation RiskThe risk is that inflation will rise, thereby lowering the purchasing power of your income. 4. Call RiskAny monthly interest payment will be lowera more serious risk to investors dependent on that income. 5. Prepayment RiskSimilar to call risk, prepayment risk is the risk that the issuer of a security will repay principal prior to the bonds maturity date, thereby changing the expected payment schedule of the bonds. 6. Liquidity RiskLiquidity risk can be greater for bonds that have lower credit ratings (or were recently downgraded), or bonds that were part of a small issue or sold by an infrequent issuer. Trading Strategy a fixed plan that is designed to achieve a profitable return by going long or short in markets. The main reasons that a properly researched trading strategy helps are its verifiability, quantifiability, consistency, and objectivity.
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