Fixed Income Flashcards
Define the spot rate and forward rate?
Define the spot curve and forward rate?
What is the par curve?
YTM is the expected rate of a return on a bond if…?
YTM is. a poor proxy for E(r) if …?
With an upward sloping spot curve the forward curve is …? If level and shape of spot curve not expected to change or rise to forward curve then how would achieve the highest total return?
What is the swap rate, what is it based on and describe the swap curve?
What is the swap spread?
What is the Z-spread and I-spread?
What is the TED-spread, Libor-OIS spread and the SOFR?
What is the pure and local expectations theories?
What is the liquidity preference theory and the segmented markets theory?
What is the preferred habitat theory and shaping risk?
What is the three factor yield curve model?
Explain the technique of riding/rolling down the yield curve?
Explain the term structure of yield volatility?
What are the three measurements of yield curve risk and which allow for shaping?
What happens to the yield curve from bull/bear steepener/flattener?
How does the maturity structure and investor demand affect yields, what are the active mangement strategies in response to rate increse/decrease and curve flatten/steepen
ow - overweight
uw - underweight
What is arbitrage, principle of no arbitrage, law of one price, arbitrage opportunity of value additivity ?
What is the arbitrage opportunity of dominance and what is an arbitrage free valuation?
What are binomial interest rate trees?
How to generate an interest rate tree and what two things do you need?
How to calculate the forward rate in next period?
Once all first pass interest rates are populated you…?
Backward induction example?
Calibration example
Explain a pathwise valuation?
Describe a monte-carlo simulation and when it would be used?
Describe the 5 steps in the MC simulation to fit to the spot curve?
What are term-structure models? What is the interest rate factor and interest rate process?
Class of models: Describe arbitrage free and equilibrium term-structure?
Describe the two types of equilibrium models (CIR and Vasieck)?
Describe the two types of arbitrage free models: Ho-lee and KWF?
Summarise the four models by type, short rate, drift term, volatility and if negative rates?
What are embedded options in bonds? Describe a bond with a call option?
Describe bonds with put options and complex options?
What is the relationship between value of putable and callable bonds with straight bond value and option value?
What is the relationship between volatility with callable/putable and straight bonds?
What happens to callable bond as rates increase?
What happens to putable bond as rates increase?
Callable bond price example
Putable bond example?
What is the option adjusted spread?
What is the relationship between OAS and volatility?
Formula for effective duration and 3 steps to calculate for callable bond?
Relationship between callable, putable and straight bond in terms of duration?
What is one sided / key rate duration, compare prices for putable and callable to straight when rates are decreasing/increasing?
What does one-side up and one-side down duration mean?
One-side up sensitivty to rate increase, one-side down sensitivity to rate decrease
Callabale and putable bonds are more sensitive to what types of changes in the curve?
How does key rate duration differ to effective and the relationship between the two? What do changes in curve refer to?
Refer to changes in par curve
What is the formula for convexity, what does convexity tell us about bond price sensitivity and what sign is convexity for putable, callable and straight bonds?
What is a cap provision and what is the value of a capped floater?
What is the value of floored floater, example?
What is a convertible bond and its properties?
What is the conversion value of a bond, what is the minimum value?
What is the market conversion premium per share?
How does bond behave with positive/negative conversion premium?
Positive premium behave like bond, negative behave like stock
What is the downside risk and upside potential of convertible bond?
What is the value of convertible bond with no forced conversion, with forced conversion and with a put?
What are the risk/return characteristics of convertible bonds
What is the G-spread?
What is default risk, default risk premium, credit risk, expected exposure, recovery rate, loss severity?
What are credit ratings and credit score?
What are the 3 main rating providers, ratings are usually for what type of debt?
Explain risk-neutral probability of default vs actual?
How to calculate PV of expected loss and credit valuation adjustment (CVA)?
How to calculate return on a bond using a transition matrix?
Probabilities in matrix
What are structural models of credit and what does it assume?
What are reduced form models, inputs are….?, assumes what?
What are the steps to calculate the credit spread?
What are the microeconomic factors that affect spread over benchmark and what are the macro factors that affect the benchmark rate? What happens to credit spread as LGD and POD increase/decrease?
What is the common term structure of credit spreads and how does credit quality affect it?
How does financial conditions affect term structure of credit spreads?
Compare the credit analysis required for securitised debt and that for corporate debt?
What is a credit derivative and what is a CDS?
What is a single-name CDS and how is payoff determined?
What is an index CDS and what are the ISDA specifications?
How does the value of the CDS to the buyer/seller change based on credit quality changes?
What are the three types of credit events?
What is a succession event and what are the settlement protocols ?
What happens under physical, cash settlement and auction?
Settlement example for bankruptcy?
How does a credit event auction work?
What are CDS index products, what are they classified by, what are the two main ones? What are they usually used for?
Valuing a CDS example? What is the hazard rate?
How to get to the value of the upfront payment and why is there an upfront payment?
Upfront payment summary, credit summary can be expressed as what?
What causes value changes in CDS? Profits for buyer are equal to what?
What are the uses of CDS?
What should the relationship between the credit risk and the yield on the bond its against be?
Pathwise valuation example
Risk neutral default probability
