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Flashcards in Fixed Income III Deck (30)
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1
Q

Steps in bond valuation (3)

A

(1) estimate coupon and principal payments
(2) Determine discount rate
(3) Calculate present value baed on individual flows

2
Q

Zero coupon bond payment notes

A

N = # of years * 2 (semi annual payments)

I/Y = YTM / 2 (semi annual payments)

3
Q

Arbitrage free valuation

A

Discount bond based on rate for each cash flow

Value must be worth sum of parts, or else arbitrageur could earn a risk free return

4
Q

Current yield formula

A

annual cash coupon / bond price

5
Q

Yield to maturity

A

Includes interest and capital gains/losses if purchased at discount/premium

6
Q

Yield to maturity formula

A

Use TMV of money keys to solve for ā€œIā€

Solve for semi annual I and * 2 to get annual

7
Q

Bond equivalent yield (BEY)

A

Semi annual rate * 2

Same as YTM for semi-annual bond

8
Q

Yield-to-call

A

Same as YTM, but:

(1) Time until call date is substituted for N
(2) Call price is substituted for FV

9
Q

Yield-to-worst

A

This is the worst yield given call provisions. Calculate YTM, YTC, etc and pick the worst.

10
Q

Yield-to-put

A

Same as YTC, but

(1) N = periods to put provision
(2) FV = put price

11
Q

Yield drawback

A

Most IRR yields (YTM for example) assume reinvestment at same rate

12
Q

Z-spread

A

Rate that would need to be added to each point on the spot curve for the geometrically linked rate to equal that of the risky bond

13
Q

Z-spread vs. nominal spread

A

Z-spread > nominal spread if yield curve is positive
Z-spread < nominal spread if yield curve is negative
Z-spread = nominal spread if yield curve is flat

14
Q

Z-spread and OAS

A

Z-spread - OAS = option cost in percent

15
Q

OAS

A

Z-spread but also including impact of options

16
Q

Forward rate agreement (FRA) notation: 1f3

A

1-year rate, beginning in year 3

17
Q

Forward rate agreement (FRA) definition

A

(1) Agreement to borrow/lend money at a certain rate in the future
(2) No actual loan made, settled in cash
(3) Long has right to borrow and makes money if rates increase

18
Q

Forward rate agreement (FRA) notional payout

A

(market rate - contract rate) * (days/360) * notional value of loan

19
Q

Forward rate agreement (FRA) interest payout

A

Notional payout / (1+interest rate) * (days/360)

Where interest = current market rate

20
Q

Forward rate agreement (FRA) 2-by-5

A

2-by-5 = in 60-days based on 90-day LIBOR

21
Q

Forwards and swaps

A

Custom and OTC

22
Q

Future

A

(1) Forward contract that is standardized and cleared
(2) Daily settlement of P/L
(3) At initiation priced at zero

23
Q

Swap

A

Series of forward contracts

24
Q

Forward

A

Agreement to buy/sell physical asset or security at a specific price on a specific date

25
Q

Long forward

A

Person that agrees to purchase the security (short will sell)

26
Q

Forward offsetting contracts

A

Can enter with another person, but still have counter party risk

27
Q

Eurodollar deposits

A

Deposits in large banks outside of the US in US dollars

28
Q

LIBOR

A

Quoted in annualized rate

29
Q

Currency forward payout

A

(Actual rate - specified rate) * notional = gain/loss

30
Q

OAS

A

Removes affect of options. I.e. OAS - option effect = z-spread