Flashcards in Fixed Income III Deck (30):

1

## Steps in bond valuation (3)

###
(1) estimate coupon and principal payments

(2) Determine discount rate

(3) Calculate present value baed on individual flows

2

## Zero coupon bond payment notes

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

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

3

## Arbitrage free valuation

###
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

## Current yield formula

### annual cash coupon / bond price

5

## Yield to maturity

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

6

## Yield to maturity formula

###
Use TMV of money keys to solve for "I"

Solve for semi annual I and * 2 to get annual

7

## Bond equivalent yield (BEY)

###
Semi annual rate * 2

Same as YTM for semi-annual bond

8

## Yield-to-call

###
Same as YTM, but:

(1) Time until call date is substituted for N

(2) Call price is substituted for FV

9

## Yield-to-worst

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

10

## Yield-to-put

###
Same as YTC, but

(1) N = periods to put provision

(2) FV = put price

11

## Yield drawback

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

12

## Z-spread

### 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

## Z-spread vs. nominal spread

###
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

## Z-spread and OAS

### Z-spread - OAS = option cost in percent

15

## OAS

### Z-spread but also including impact of options

16

## Forward rate agreement (FRA) notation: 1f3

### 1-year rate, beginning in year 3

17

## Forward rate agreement (FRA) definition

###
(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

## Forward rate agreement (FRA) notional payout

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

19

## Forward rate agreement (FRA) interest payout

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

Where interest = current market rate

20

## Forward rate agreement (FRA) 2-by-5

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

21

## Forwards and swaps

### Custom and OTC

22

## Future

###
(1) Forward contract that is standardized and cleared

(2) Daily settlement of P/L

(3) At initiation priced at zero

23

## Swap

### Series of forward contracts

24

## Forward

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

25

## Long forward

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

26

## Forward offsetting contracts

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

27

## Eurodollar deposits

### Deposits in large banks outside of the US in US dollars

28

## LIBOR

### Quoted in annualized rate

29

## Currency forward payout

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

30