Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Fixed Income > Credit strategy > Flashcards

Credit strategy Flashcards

1
Q

interpolated benchmark

A

use of the most liquid, on-the-run government bonds to derive a hypothetical x-year UK gilt YTM

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

effective spread duuration

A

it has equation look like effective duration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

CVA

A

Credit valuation adjustment: present value of credit risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

default risk

A

probability of default:
+ likelihood that :
+ a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest
+ according to the terms of the debt security

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

loss severity

A

+ loss given default - LOD: amount of loss if default occurs
+ expressed as % of par value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

credit loss rate

A

represents the realized percentage of par value lost to default for a group of bonds = the bonds’ default rate x the loss severity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

credit migration

A

likelihood of change in rating of public bond, usually has a negative effect to bond prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

credit cycle

A

cycle of credit, should learn by heart the table

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

G-spread

A

use interpolate from gov yield
Adv:
+ transparent & maturity matching with default risk free bond
Disadv:
+ Subject to change in gov bond demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

I-spread

A

interpolated spread: spread use interest rate swap as a benchmark = yield - swap rate
Adv:
+ used as hedge or carry trade
Disadv:
+ Point estimate of term structure (resolve in Z-spread)
+ Limited to option-free bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

asset swap spread

A

= bond fixed coupon rate - MRR (market reference rate)
Adv:
+ Use in traded spread: coupon <> MRR + spread
Disadv:
+ Tradable spread rather than spread measure coresponding to CF
+ Limited to option free bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

zero-volatility spread (Z-spread)

A

the spread add to the discount to help the bond price equal market price
Adv: capture term structure
Disadv:
+ more complex calculation
+ limited to option free bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Credit default swap (CDS) basis

A

= Z-spread on a specific bond - the CDS spread of the same (or interpolated) maturity for the same issuer.
Adv: Interpolated CDS spread & Z-spread
Disadv:
+ traded rather than measure corresponding
+ Limited to option free

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

option-adjusted spread (OAS)

A

a generalization of the Z-spread calculation that incorporates bond option pricing based on assumed interest rate volatility:
Adv: can compare option free bond to embedded option
Disadv:
+ complex
+ not stable overtime

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

discount margin (DM)

A

Additional return because of risky asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

zero-discount margin (Z-DM)

A

When price = par

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

effective spread convexity

A

like convexity but related to delta spread

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

spread duration

A

= - (effSpreadDu x deltaspread) + 1/2 x EffSpreadCon x (delta Spread)^2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

OAS duration

A

= - (effSpreadDu x deltaspread) + 1/2 x EffSpreadCon x (delta Spread)^2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Duration Times Spread (DTS)

A

DTS ≈ (EffSpreadDur × Spread)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Excess Spread

A

= Spread x t - EffSpreadDu x Delta Spread

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Expected excess spread return

A

= Spread x t - EffSpreadDu x Delta Spread - 1/2 EffSpreadCon x (deltaSpread)^2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Effective Spread Duration

A

like Effective Duration but replace yield by Delta MRR (Market reference rate)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Effective Spread Duration

A

look like Effective Duration by replace yield by Delta DM (discount margin)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Structural credit model

A

+ use market-based variables to estimate the market value of an issuer’s assets and the volatility of asset value.
+ The likelihood of default is defined as the probability of the asset value falling below that of liabilities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

reduce form model

A

solve for default intensity, or the POD over a specific time period, using observable company-specific
variables such as:
+ financial ratios
+ recovery assumptions
as well as macroeconomic variables, including:
+ economic growth
+ market volatility measures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Default intensity

A

it is hazard rate, the probability of default for a certain time period conditional on no earlier default

28
Q

bottom-up credit strategy

A

finding the best issuer/individual bond investment rather than focus on macro-enviroment
+ Step 1: identify universe of bond relevant to mandate
+ Step 2: divide universe into sectors such as undustry/ geography
+ Step 3: looking for relative misvaluation to determine securities to select
Credit analysis is assessment the likelyhood of issuer making scheduled principal + interest payment, include:
+ Operating history + competitive position of the issuer
+ Financial ratio include: profitability, leverage, coverage ratio

29
Q

Top-down credit strategies

A

+ focus on macro factors that affect the credit portfolio (strength of economic growth, corporate profits)
+ Use:
* indentify when focus on HY / IG
* sectors most likely to improve -> can overweight this factors

30
Q

factor-based credit strategies

A

use style-based factors, identify as offering risk premium in coporate bond investing.
4 factors:
+ Carry -> OAS
+ Defensive: -> risk adjust return
+ Momentum: outperform go on to outperform in the future
+ Value

31
Q

conditional Var

A

expected loss

32
Q

incremental VaR

A

impact of change in portfolio position

33
Q

relative VaR

A

measure expected tracking error versus benchmark portfolio

34
Q

CDS Price

A

= 1 + (Fixed Coupon - CDS Spread) x EffSpreadDu

35
Q

CDS curve

A

plot of CDS spread across maturities

36
Q

static Credit spread curve strategy

A

hypothesis: credit spread curve remain unchange
method:
+ lowering the average credit rating of bond portfolio
+ increasing spread duration by buy + hold longer-dated bond
+ sell protection

37
Q

Dynamic credit spread strategy

A

base on credit cycle to buy/sell bond/protection

38
Q

Global credit strategy

A

based on:
+ diversify through investing in different sectors
+ sector difference exist between developed market
+ difference in accounting standard
+ difference in credit manitude & timing related to credit cycle

39
Q

credit structured

A

CDOs, CLOs, MBS, ABS, Covered Bonds

40
Q

user-defined parameter

A

include:
+ models for term structure, risk,
+ scenario analysis
+ filter for include/exclude bonds by sectors/ESG ratings.

41
Q

rule to immunize a single liability

A

(1) portfolio market value (PVA) equals (or exceeds) PVL
(2) Portfolio Macaulay duration matches the due date of the liability (DA = DL)
(3) Minimize portfolio convexity (to minimize dispersion of asset cash

42
Q

Matching issuer exposure weights

A

to control for specific event risk affecting only that issuer, such as bankruptcy

43
Q

bums problem

A

bum is a less creditworthy issuer

44
Q

Immunized Portfolio Convexity

A

= (Mac Du ^2 + Mac Du + Dispersion) / (1 + CF Yield)^2

45
Q

money duration

A

A measure of the price change in units of the currency in which
the bond is denominated. Money duration can be stated per 100
of par value or in terms of the bond’s actual position size in the
portfolio
BPV = Money Du x 0.01%

46
Q

dollar duration

A

it is money duration

47
Q

Duration drift

A

Duration drift is the change of duration due to the passage of time
Eg: The duration drift has arisen because of a widening spread between corporate and government bond yields as interest rates in general have come down.

48
Q

Butterfly spread

A

butterfly spread is equal to twice the medium-term yield
minus the short-term and long-term yields,

48
Q

Butterfly spread

A

butterfly spread = 2 x the medium-term yield - (the short-term + long-term yields)
+ Humped
+ Sauce
+ butterfly spread / butterfly /twist

49
Q

Immunizing with coupon-bearing bonds

A

continuously matching the portfolio Macaulay duration with the Macaulay duration of the zero-coupon bond over time and as the yield curve shifts, even though the zero-coupon bond could be hypothetical and not exist in reality

50
Q

A duration-neutral flattening trade

A

involves a short short term bond position and a long long term bond position, which have a “matched” duration or portfolio duration of zero

51
Q

Flight to quality

A

Thị trường sập, quay sang mua tài sản tốt
market stress scenario, investors sell high-risk, low-rated bonds, which fall in price, and purchase government bonds, which experience price appreciation

52
Q

roll down return vs rolling yield

A

Rolling yield = roll down return + coupon income

53
Q

goals of credit strategies

A

choose maximize credit spread
across issuer types, industry,…
within predescribe investment mandate

54
Q

method to hedge the tail risk

A

Reduce tail risk:
+ Position limits
+ Risk budgeting
Hedge tail risk:
+ Swaption
+ CDS

55
Q

QM (description, Adv, disadv)

A
  1. Description: Yield of original FRN - MRR
  2. Advantage: Represents periodic spread related FRN cash flow
  3. Disadvantage: Does not capture changes in credit risk over time
56
Q

DM (description, Adv, disadv)

A
  1. Description: Yield to price FRN at par - MRR
  2. Advantage: Establishes spread difference from QM with constant MRR
  3. Disadvantage: Assumes a flat MRR zero curve
57
Q

Z - DM (description, Adv, disadv)

A
  1. Description: Yield spread over MRR curve
  2. Advantage: incorporate forward MRR rates in yield spread measure
  3. Disadvantage: more complex calculation and yield spread does not match FRN cash flow
58
Q

The meaning of Credit excess spread return

A

(1) negative is not efficiency
(2) higher excess spread return -> more attractive

59
Q

CDOs (description, exposure, application)

A

(1) Description: backed by a diversified pool of debt obligations
(2) Exposure: Redistribute portfolio debt cash flows across ratings spectrum
(3) Create tailored portfolio-based debt exposure categories/profiles unavailable in the cash bond market

60
Q

CLOs (description, exposure, application)

A

(1) Description: backed by a diversified pool of floating-rate leveraged loan obligations.
(2) Exposure: Redistribute portfolio loan
cash flows across ratings spectrum. (like CDOs)
(3) Create tailored portfolio-based debt exposure categories/profiles unavailable in the cash bond market (like CDOs)

61
Q

MBS (description, exposure, application)

A

(1) Description: a pool of commercial or residential mortgage loans.
(2) Exposure: Provide portfolio-based exposure to real estate cash flows
(3) Offer active managers exposure to real estate and to volatility (prepayment/extension risk) unavailable in the cash bond market

62
Q

ABS (description, exposure, application)

A

(1) Description: pool of credit card, auto, and other loans
(2) Exposure: Provide portfolio-based exposure to consumer loan cash flows
(3) Offer active managers direct exposure to consumer loans and to volatility unavailable in the cash bond market

63
Q

Covered Bonds

A

(1) Description: Senior debt obligations backed by pool of commercial/residential mortgages or public sector assets
(2) Exposure: Provide portfolio-based exposure to real estate cash flows with recourse to issuer (dual recourse)
(3) Offer active managers direct exposure to consumer loans and to real estate/public sector cash flows unavailable in the cash bond market

64
Q

dual recourse

A

specify by covered bond (bảo vệ 2 lần)

65
Q

how to increase convexity

A

(1) Long putable, Long calls, Puts
(2) Short callable, short MBS

66
Q

Standardized of Fixed coupon HY CDS contract and IG CDS contract

A

IG CDS contract: 1%
HY CDS contract: 5%

Fixed Income (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions