Fixed Income II Flashcards Preview

CFA 1 > Fixed Income II > Flashcards

Flashcards in Fixed Income II Deck (26):
1

Duration - impact of call options

Less sensitive - limits upside price movement

2

Duration - impact of put options

Less sensitive - limits downside price movement

3

Duration Formula

Percentage change in price / percent change in yield

4

T-bills

(1) maturity < 1 year
(2) 4-week, 3-month, and 6-months

5

Treasury notes

(1) Semi annual payments
(2) 2, 3, 5 and 10 year maturities
(3) Quoted in 32nds, e.g. 100.5 = 100 & 5/32

6

STRIP prepayment affect

(1) Interest only receives less
(2) Principal only gets same amount faster

7

Muni tax treatment

Interest exempt from federal tax
same state = state tax exempt
Capital gains not exempt

8

Double-baralled munis

Backed by taxes and revenue sources

9

Appropriation-backed (moral bonds)

State acts as back-up, though not legally required to do so

10

Revenue bonds

Supported by revenues generated by projects. Do not require voter approval. More risky.

11

Unsecured debt (debentures)

Not backed by any pledged asset

12

Commercial paper

< 270 days, exempt from SEC regulations

Issued at a discount like t-bills

13

Bankers acceptance

Letter of credit guaranteeing payment between two banks, usually when shipping goods.

14

Special purpose vehicle

(1) Separate legal entity
(2) Shields assets from corporations general creditors
(3) Used for ABS
(4) allows for higher rating

15

Collateralized Debt Obligation (CDO)

Debt instrument with underlying pool of other debt.

Tranches are created based on seniority and claims to cash flow.

16

Pure expectations theory

(1) Yield curve represents expectations of short term rates in the future
(2) If short-term rates are expected to rise, future rates are higher than current rates

17

Liquidity preference theory

(1) In addition to pure expectations, investors require a risk premium for holing longer dated bonds
(2) yield curve can still slope down if expectations exceed liquidity premium

18

Market segmentation theory

(1) supply and demand dictate rates over different time periods

19

Preferred habits theory

(1) Weaker form of market segmentation theory
(2) Investors can be induced to move from preferred ranges, if rates are high enough.

20

Yield to maturity

Single discount rate that makes present value of a bod's future cash flows equal to market price.

21

Spot rate

Discount rate for individual future payments.

22

Absolute yield spread

Yield on higher yield bond - yield on lower yield bond

23

Relative yield spread

Absolute yield spread / benchmark bond yield

24

Yield ratio

Subject bond yield / benchmark bond yield

25

After tax yield formula

taxable yield * (1-marginal tax rate)

26

Taxable equivalent yield

(tax free yield) / (1-marginal tax rate)