on 18-Oct-2015 (Sun)

you MUST have a user

for zero coupon bonds, the yield to maturity and the rate of return are equivalent since there are no coupon payments to reinvest.
it is dubious. YTM is not about reinvesting coupons

at the short end of the curve, where there are few cashflows, the first few elements of P (rate function) may be found by bootstrapping from one to the next.

All the coupons are reinvested at an interest rate equal to the yield-to-maturity - it is a common mistaken assumption, but not true. Each part of today's price earns interest before being paid out either as a coupon or as a principal.

bond convexity is a measure of the sensitivity of the duration of a bond to changes in interest rates

Bond convexity is the second derivative of the price of the bond with respect to interest rates (duration is the first derivative)

a foreign exchange swap, forex swap, or FX swap is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward)

The simplest currency swap structure is to exchange only the principal with the counterparty at a specified point in the future at a rate agreed now. Such an agreement performs a function equivalent to a forward contract or futures. The cost of finding a counterparty (either directly or through an intermediary), and drawing up an agreement with them, makes swaps more expensive than alternative derivatives (and thus rarely used) as a method to fix shorter term forward exchange rates. However for the longer term future, commonly up to 10 years, where spreads are wider for alternative derivatives, principal-only currency swaps are often used as a cost-effective way to fix forward rates. This type of currency swap is also known as an FX-swap

Another currency swap structure is to combine the exchange of loan principal, as above, with an interest rate swap. In such a swap, interest cash flows are not netted before they are paid to the counterparty (as they would be in a vanilla interest rate swap) because they are denominated in different currencies. As each party effectively borrows on the other's behalf, this type of swap is also known as a back-to-back loan.

The curve shows the relation between the (level of) interest rate (or cost of borrowing) and the time to maturity, known as the "term", of the debt for a given borrower in a given currency

The coupon rate (or nominal rate or nominal yield) of a fixed income security is the (annualized) amount of the coupon, which is a fixed percentage of the par value.

Unlike current yield, nominal yield does not vary with the market price of the security.

The current yield, interest yield, income yield, flat yield, market yield, mark to market yield or running yield is a financial term used in reference to bonds and other fixed-interest securities such as gilts. It is the ratio of the annual interest payment and the bond's current clean price

The concept of current yield is closely related to other bond concepts, including yield to maturity, and coupon yield

A financial asset is unlike a real asset (a building, a car, a television, a painting) because there can only be a financial asset (notes and coins in your pocket, cash in the bank, corporate or government bonds) if there is an equal and opposite financial liability. The two always net off to nil.

The traditional books explain how banks started off using 'fractional reserve banking', i.e. they take 100 gold coins as deposits and lend out 90 of them, keeping 10 in the safe in case depositors come round to make a withdrawal.

n the old fashioned view of banking regulation (or self-regulation), we look at the assets side: as long as the bank has a tenth* of its assets in liquid form (i.e. gold coins in the safe), it will probably do OK.

The modern view of banking regulation (i.e. Basel rules), we look at the liabilities side, and say that share capital (a non-repayable liability or source of finance) should be at least a tenth* of total assets; so if the value of assets falls by a tenth or less, there are still enough assets left to repay depositors and bondholders.

Basel rule says something like "The total amount that a bank can lend out is no more than ten times its share capital" - it says nothing about ratio of lending to deposits, like in traditional view of "fractional reserve banking".

what money is, namely the physical or electronic record of who owes whom how much; 'money' is a liability as much as it is an asset

you can only have cash in the bank if somebody somewhere owes the bank money

During the years of the credit bubble, banks were not issuing any new shares - if anything they were buying them back (reducing share capital).

It is only after things went horribly wrong again in 2008 that banks started raising more share capital (or converting bonds to share capital).

The lending bank doesn't incur the liability until the cheque is actually paid in, whether that is minutes or days later doesn't really matter.