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Pricing fixed income securities against an interest swap curve

This second volume refers to the same general market conventions as the one described in the first volume for the calculation of the cash flows of fixed income instruments in euro. However, it uses a different approach for the valuation of fixed income instruments, pricing them against the zero coupon curve derived from the par interest swap curve. This more sophisticated methodology based on a common benchmark reference curve, the interest rate par swap curve, allows for a better comparison between the yields of various fixed income instruments launched on a same maturity by different issuers that bear different coupons and different market prices.

This volume concentrates on the valuation of plain vanilla fixed income securities based on the interest rate par swap curve, excluding in principle the pricing of exotic bonds.
  • It aims to explain the main concepts used for the interest rate derivative valuation of fixed income securities :
1)                 How the actuarial pricing methodology of plain vanilla fixed income instruments differs from the one based on a derivative valuation.
2)                 The rate relationship between the par swap curve, the zero coupon curve and the forward curve that are derived from this par swap curve.
3)                 And describes the valuation of some plain vanilla fixed income securities, notably fixed rate bonds, I/L bonds and floating rate bonds referenced to a long term interest rate reference like CMS (Constant Maturity Swaps) or CMT (Constant Maturity Treasuries) bonds.
  • It does not intend to detail extensively each specific structure of Over the Counter, OTC, or Exchange Traded Derivatives, and the exotic structures of some fixed income securities.



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last update 02 June 2020