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CFA > Fixed income > Flashcards

Fixed income Flashcards

(52 cards)

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1
Q

Number of paths for binomial tree

A

2^(n-1)

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2
Q

Upper node interest rate

A

Lower node interest rate*e^2σ

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3
Q

Lower node interest rate

A

((Upper node interest rate))/e^2σ

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4
Q

P. of bond

A

VND – CVA

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5
Q

CVA

A

PV (Expected loss) = LGD * prob of default*discount factor
Dove–> LGD = VND * (1-Recovery rate)

Prob of default = hazard rate

Sommo tutti i T

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6
Q

VND

puo essere anche semplicemente l’exposure = par value + coupon

A

PV of bond

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7
Q

LGD

A

VND* ( 1- recovery rate)

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8
Q

Prob of survival

A

(1- p of default)^N

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9
Q

Risk neutral default probability P

A

((VND(1-P))+((VND-LGD)(P)/(1+r)

Dove–> LGD = VND * (1-Recovery rate)

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10
Q

CF anno default

A

Exposure – LGD

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11
Q

Δ%P

A

(modified duration of the bond) × (Δ spread)

Se ho anche probability la devo molitplicare ad ogni risultato

Delta spread = credit spread from other letter - credit spread from my letter —> da dove vado a dove sto

E poi sommo tutti i risultati

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12
Q

Credit spread

A

YTM (risky) – YTM (riskfree)

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13
Q

Upfront payment (by prot. Buyer)

A

PV (protection leg) – PV (premium leg)

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14
Q

Upfront premium

A

(CDS Spread – CDS Coupon) * CDS duration

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15
Q

V of capped floater

A

Straight floater value – Embedded cap value

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16
Q

V of floored floater

A

Embedded floor value - Straight bond

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17
Q

Minimum value of convertible bond

A

Greater of conversion value or straight value

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18
Q

Conversion value of convertible bond

A

Stock market price * Conversion ratio

dove conversion ratio = n. of common shares for which a convertible bond can be exchanged

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19
Q

Market conversion price

A

Market bond price / Conversion ratio
Conversion ratio = Par value / Conversion price

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20
Q

Market conversion premium per share

A

Market conversion price – Stock’s market price

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21
Q

Owning stock or Equity

Study These Flashcards
A

Value of long call = max (S-K)

22
Q

Owning debt

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A

Value of short put = min (K-S)

23
Q

Swap spread

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A

Swap rate - treasury yield

info on supply and demand –> swap rate - treasury yield

24
Q

TED sread

Study These Flashcards
A

3 monts MRR - 3 months T bill rate

info on credit risk in the economy–> 3 months MRR rate - 3 months T bill rate

25
Cosa indica MRR OIS spread
MRR rate - overnight rate well being of banking system --> low spread 0 high liquidity-->MRR rate - overnight spread
26
OAS
credit and liquidity risk when volatility ↑, computed OAS for callable bond ↓ and putable bond ↑ o Callable --> if volatility increase --> OAS decrease--> o Putable --> if volatility increase --> OAS increase-->
27
cosa indica structural model
o explain why default occurs o Estimation of default barrier and default occurs if the value of firms assets are below this barrier o They require info of company --> Default is an endogenous variable (inside the company) o Option pricing theory o Use traded market price
28
Cosa indica Reduced model
o explain when default occurs o Default = exogenous variable o Parameter estimation: Default intensity o Useful for Off-BS o The probability of default (default intensity) and the recovery rate depend on the state of the economy and are not constant. o Use historical variables (financial ratios and macroeconomic variables) known by everyone
29
V of callable bond
v straight bond - v call
30
V putable bond
V straight bond + v put
31
Flat yield curve- cosa indica?
all spot = all forwards --> expect decrease in inflation
32
* If expectation of Upward sloping credit curve - cosa indica?
expectation of recession reduce duration of pf *
33
Perchè Swap rate curve preferita?
o Swap rates reflect the credit risk of commercial banks rather than governments. o The swap market is not regulated by any government. o The swap curve typically has yield quotes at many maturities  indicates the premium for time value of money at different maturities. o Institutions like wholesale banks use swap curves to value their assets and liabilities. o Indicate time value of money
34
* Unbiased expectations th
o Forward rates = unbiased predictor of future spot rates. o Interest rates expected to increase in future o Upward sloping yield curve = int rates are expected to increase in the future o Forward = Break even rate = investor is indifferent between investing for the full term of their investment horizon or investing in part of the horizon and rolling the investment over at the "break-even" forward rate for the remainder of the term.
35
* Local expectations th
o In the short term= risk-free rate. o In the long term = risk premium
36
* Liquidity preference th
o Longer maturity = higher liquidity premium o Current forward rate > Future spot rates
37
* Segmented markets th
interactions of supply and demand for funds in different market (i.e., maturity) segments. o Interest rate are determined by supply/demand for a given maturity sector--> High demand = Lower interest rates
38
* Preferred habitat th
market participants will deviate from their preferred maturity habitat if compensated adequately.
39
Effective duration
[(PV-) – (PV+)] / (2 x (curve change) x (PV0))
40
o economic expansions--> effect on yield curve
rising inflation cb increase ST rates  bearish flattening of the yield curve. L’economia va bene in trentino e rispondono con gli orsi
41
o recessionary times
 cb reduce st rates  bullish steepening. l’economia va male in spagna e rispondono con I tori
42
o market turmoil
reduce LT government bond yields  bullish flatteningLT bullet is appropriate non si capisce niente in turmoil il toro impazzisce e si sdraia
43
* Equilibrium Term Structure Models
mean reversion Cox-Ingersoll-Ross (CIR) = volatility varies with rates (aggiungo la σ√r) Vasicek model. volatility in this model does not increase as level of interest rates increase
44
o Arbitrage-free models
bonds in the market are correctly priced  Ho-Lee model-->time-dependent drift; noise component  Kalotay-Williams-Fabozzi-->constant volatility
45
Gauss + model
LT rate / volatility depends on macroec. variables (economy inflation…) and is mean reverting
46
stripping
o If the principle of value additivity does not hold buying a bond and then selling off its parts
47
 reconstitution
buying the parts to sell a reconstituted bond
48
When is convexity positive or negative
o Straight and putable bonds = positive convexity. o Callable bonds = positive convexity when rates are high. However, at lower rates, callable bonds =negative convexity. ricorda disegno
49
* ABS
o RISKS: Operational and counterparty risk of servicer o Short term granular and homogenous vehicles are evaluated using statistical based approach o Medium term and homogenous obligations are evaluated using portfolio based approach o Credit enhancement and distribution waterfall relevant characteristics o Credit rating agencies do not use same credit ratings for ABS as corporate debt
50
Effective duration
((PV-) - (PV+)) / (2* curve change * PV0)
51
Duration theory
o Callable bonds --> lower one sided down duration than one sided up duration o Putable bonds --> higher one sided down duration than one sided up duration o Callable bond -->high duration (perchè non viene chiamata) when low coupon and high yield o Putable bond -->high duration when high coupon and low yield
52
credit spread
o La credit spread term può essere o positive o flat o Più è alto il rating più è flat la curva del credit spread o Economia va bene --> credit spread diminuisce o Securities with lower credit quality --> greater sensitivity to credit cycle  Portfolio based approach --> a lot of small loans very dynamic  Loan-by loan approach --> few big loans  Statistics based approach --> for static loans

CFA (9 decks)

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