Fixed Income IV Flashcards Preview

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Flashcards in Fixed Income IV Deck (17):
1

Initial margin (futures)

Amount must be deposited to trade, different for each asset class

2

Maintenance margin (futures)

Amount that must be maintained, if falls below, funds must be deposited to get back to initial margin.

3

Eurodollar futures

(1) add on yield to LIBOR
(2) price = (100 - annualized LIBOR yield)
(3) example: Libor = 2.4%, price = 97.6

4

Index option payoff

(Price - strike) * multiplier

5

Option adjustments

(1) adjusted for stock splits
(2) NOT adjusted for cash dividends

6

Future call option

Right to enter into long future at a given futures price

Puts work the same way

7

Interest rate caps

Series of interest rate call options with expirations corresponding to reset dates on floating loan.

Pay you if rate moves above cap.

8

Interest rate floors

Series of interest rate put options that pay you if floating rate falls

9

Effective duration

(bond price when yields fall - bond price when yields rise) / (2*initial price * change in yield in %)

10

Option adjusted duration (OAS)

Same as effective, but requires a pricing model that takes into account options.

11

Macaulay Duration

Estimate of bond's interest rate sensitivity based on time in years until cash flows arrive.

12

Modified Duration

Slight improvement to macaulay, takes into account YTM as well. Not ideal for bonds with embedded options.

13

Interpreting duration

(1) slope of price-yield curve at current YTM
(2) weighted average time until cash flow received
(3) Approximate % change in price for a 1% change in yield

14

Duration and convexity formula

(-duration * change in yield) + (convexity*(change in yield^2))*100

15

Convexity adjustments

Positive when convexity is positive, and negative when convexity is negative

16

Effective convexity

Takes into account embedded options

17

Value bond using treasury spot rates

Add the z-spread to each spot rate and discount each cash flow back separately. Don't use simply the nominal spread.