BOND BASICS - IV
Settlement Date Settlement date is the date when a security and the payment for it are actually exchanged between buyer and seller. It is also commonly known as the valuation date.
Swap Hedge Ratios A swap hedge ratio answers the question: "If I sell Bond A, how much of Bond B should I buy to achieve my swap objectives?" While there have been various weighting schemes over the years, and while there may be good reasons for using such schemes as "$ for $ swap", the "dollar duration"-based approaches are the ones which answer the above question most appropriately for most investors.
$ for $ Swap A bond swap in which the weighting is established by dividing the net proceeds of the "sell" security by the net proceeds of the "buy" security, rounding down to the nearest number of whole "buy" bonds. Note that you may purchase more or less of the second bond depending on the bonds' respective invoice prices. For example, when you sell 1,000M face value of the first bond at 110.00%, your proceeds amount to $1,100M (assuming no accrued interest is due). With this, you may purchase 1,100M of bonds trading at par.
Par for Par Swap A bond swap in which the investor replaces the par value of the bonds sold with exactly the same par amount of bonds purchased. This only makes sense if the swap represents a trade between two bonds which are virtually substitutes for one another.
Yield Value of a 32nd Swap A bond swap in which the weighting of the two bonds is made according to the respective values of the yield values of a 32nd. This weighting will be very close to weighting the trade according to a duration scheme.
Dollar duration, dPdY, or "risk" Swap A bond swap in which the weighting of the two bonds is made according to their respective measures of $ duration, defined to be the product of the modified duration of the bond and its full price (dollar price plus accrued interest).
Tom Next Tom next or "tomorrow next" refers to a transaction in the interbank market in Eurodollar deposits and the foreign exchange market with a next business day value or delivery date
Underwrite To assume the risk of buying a new security issue from a corporate or federal entity, and profiting or losing by reselling at a spread between a fluctuating public offering price and the purchase price.
Volatility A relative measure of how rapidly the price of a security falls or rises within a short period of time.
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