Fixed Income

Question 1

I Spread (Interopolated Spread)

Answer 1

Yield spread of a bond over swap rate of a bond with same tenure

This assumes yield curve stays flat (Yield/IRR is constant over periods)

Question 2

Z Spread (Zero volatility spread)

Answer 2

The additional spread over the spot curve. Accounts for varying yields/discount rates

Question 3

Spot Curve

Answer 3

Zero coupon bond

Question 4

Interest indexed bonds

Answer 4

Only interest payment is effect by inflation not the index

Question 5

Capital indexed bonds

Answer 5

Only the principal payment is adjusted for inflation

Question 6

Make- whole bonds

Answer 6

A type of callable bonds. All future CF and principal payment is calculated and paid.
As opposed to embedded call option where only the fixed price principal payment is made

with the discount rate being based on a predetermined spread over the YTM of a gov bond. (The discount is typically much lower than what it would be at MV)

Question 7

Bermuda Style bonds

Answer 7

Issuer can call bond on pre determined dates. Typically on the coupon date

Question 8

Spot rates

Answer 8

The Yield/ discount on zero coupon bonds.

Matching different spot rates that match with coupon cf payments of a bond enables identifying arbitrage opportunities

Exp.) 1yr spot =2% 2yr spot =3% Then the price of a 2 year bond with X payment should be the PV using the spot rates as a discount

Question 9

Full Price/Dirty Price Bond

Answer 9

The price of the bond INCLUDES Accrued Interest. This is the price that is paid for the bond

Question 10

Flat Price/ Clean Price

Answer 10

This price does not include accrued interest. This is the price of the bond that is typically quoted

Question 11

Pricing bonds that have low liquidity and no easily findable public pricing.

Answer 11

Matrix pricing

Question 12

Actual Actual Yield Convention. Government equivalent yield

Answer 12

Typical with government bonds. Actual ALL days between last coupon payment and settlement day/ divided by total number of days in coupon payment.

Government bonds are typically quoted on an actual/actual basis. Corporate bonds can be converted to the government equivalent yield in order to accurately find the spread over a benchmark

Question 13

30/360 - Street Convention

Answer 13

Typical with corporate bonds. Assumes 30 days in month 360 days in year

Question 14

Current Yield/ Income Yield/ Running Yield

Answer 14

Sum of coupon payments divided by the flat price. A less accurate signal of yield. Ignores capital gain/loss

Question 15

Simple Yield

Answer 15

Sum of coupon payments + straight lined ammortized gains/losses divided by flat price

Question 16

Yield to worst

Answer 16

In regards to an embedded call with multiple call dates, it is the call date/YTM that if exercised would have the lowest yield

Question 17

Option adjusted price

Answer 17

Flat price - the value of embedded call option

Question 18

Quoted Margin

Answer 18

The spread on a FRN over the reference rate.

Question 19

Discount Margin/ Required Spread

Question 20

MRR: Money market Rate/ Reference Rate

Answer 20

Usually a short term money market rate used as a benchmark

Question 21

Quoted Margin

Answer 21

Spread over the reference rate that is received in coupon payments

Question 22

Discount Margin/ Required Margin

Answer 22

Yield spread REQUIRED by investors over reference rate

Question 23

Quoted Margin> Discount margin

Answer 23

FRN priced at premium

Question 24

Discount margin/Required margin> Quoted Margin

Answer 24

FRN Priced at discount

Question 25

What kind of money market instruments use the market discount rate

Answer 25

Treasury Bills: Commercial Papers (Why)

Usually issued at a discount

Question 26

What kind of money market instruments use the Add on rate

Answer 26

Repo Rate, CD, Index’s

Question 27

What is the formula for Market discount rates

Answer 27

Find the PV/issuance price of the bond by calculating the multiple of Future value.

The future value/redemption value is always quoted and given

PV= FV *( days left/total days) * Discount rate

If there are alot of days left then the FV is less of a representative of the PV AKA the multiple is smaller

Calculate Discount rate:
1.) (Days in the year/ days left in maturity) > This gives the periodicity and annualizes/ standardizese the yield to the length of the bond

2.(FV-PV)/FV***

3. Step 1 * 2= Discount rate

Question 28

Bond Equivalent Yield(BEY)

Answer 28

Is a money market bond quoted on a the 365 day AoR basis

Used to compare DR quoted bonds with AOR quoted bonds

1. Find the PV of the DR quoted bond.
2. Calculate the AOR using the DR PV and the AOR periodicity
3. Result is the BEY

Question 29

AoR formula

Answer 29

Find the redemption value. The price is always quoted

Formula for PV/MV price is discounting the fv/(1+days/total days * Aor)

Will need to shuffle to find FV

Question 30

Spot Rate

Answer 30

The zero coupon government rate of a security.

Treat each cf as a zero coupon bond, so that the yield is most accurate and matches with the spot rate.

Used to find the PV of a bond

Question 31

Par Rate

Answer 31

Find the coupon rate of a security that results in the bond = par. Use spot rates as discount

When coupon=yield, the bond is priced at par

Question 32

Forward Rate/ Implied Rate/ Forward Yield

Answer 32

Gives the incremental/marginal yield

Is useful in preventing arbitrage

Example: 3 year forward must = the geometric average of the 2 year forward and 2Y1Y/ implied forward rate of a 1 year bond purchased in 2 years

Question 32

Carrying Value

Answer 32

purchasing price of security+- the amortized or discounted amount at the point.

Capital gain/loss only occurs if yield changes.

Capital gain = selling price+- carrying value

Question 33

Full price using Accrued interest formula??? Might need to rewrite

Answer 33

Flat price + PV of the accrued interest
PV full price

Question 34

Yield to Worst

Answer 34

The call price that is associated with the lowest yield if excercised