C09 Pricing Conventions, Discounting and Arbitrage
- Define discount factor and use a discount function to compute present and future values.
- Define the “law of one price,” explain it using an arbitrage argument, and describe how it can be applied to bond pricing.
- Identify arbitrage opportunities for fixed income securities with certain cash flows.
- Identify the components of a US Treasury coupon bond and compare the structure to Treasury STRIPS, including the difference between P-STRIPS and C-STRIPS.
- Construct a replicating portfolio using multiple fixed income securities to match the cash flows of a given fixed-income security.
- Differentiate between “clean” and “dirty” bond pricing and explain the implications of accrued interest with respect to bond pricing.
- Describe the common day-count conventions used in bond pricing