Fixed Income III Flashcards Preview

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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

OAS

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