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Fixed Income Securities, 4th Edition
book

Fixed Income Securities, 4th Edition

by Bruce Tuckman, Angel Serrat
September 2022
Beginner content levelBeginner
560 pages
17h 36m
English
Wiley
Content preview from Fixed Income Securities, 4th Edition

APPENDIX TO CHAPTER 1Prices, Discount Factors, and Arbitrage

A1.1 DERIVING REPLICATING PORTFOLIOS

To replicate the 7.625s of 11/15/2022, Table 1.5 uses the 2.875s of 11/15/2021, the 2.125s of 05/15/2022, and the 1.625s of 11/15/2022. Number these bonds from 1 to 3, and let upper F Subscript i be the face amount of bond i in the replicating portfolio. Then, the following equations express the requirement that the cash flows of the replicating portfolio equal those of the 7.625s on each of the cash flow dates. For the cash flows on November 15, 2021,

For the cash flows on May, 15, 2022,

And for the cash flows on November 15, 2022,

Solving equations (A1.1)(A1.2), and (A1.3) for upper F 1, upper F 2, and gives the replicating portfolio's face amounts reported in Table 1.5. Note that, because one bond matures ...

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ISBN: 9781119835554Purchase Link