Module 53: Yield and Yield Spread Measures for Fixed-Rate Bonds Flashcards
(18 cards)
What is the periodicity of the bond?
It is the number of bond coupon payments per year. e.g. semiannual coupons = periodicity of two
What is the Semi Annual Bond Basis / Equivalent Yield
Is the yearly yield that you’ve taken by computing a smaller timeframe bond (monthly, quarterly, semiannually) and multiplying it by the relevant number.
What is compounding and Yield relationship
If compounding is more frequent then a lower annual YTM is enough to get the same amount of PV
What is the effective annual yield
= (1+ YTM / N)^N = (1+YTM / M)^M
It is the YTM with a periodicity assumption = 1
How do you convert between yields and rates with different YTMs?
You need to equal the different bond basis with each other and then solve
What is the street convention
It is the yield to maturity assuming payments are made on scheduled dated, taking into account weekends and holidays, so paying on the next business day
what it the true yield?
These are yields calculated by actual coupon payment dates, regardless of whether it’s a weekend or holiday, so they will be slightly lower than street convention yields
What is the difference between the current yield and a simple yield?
Current Yield: Coupon / Current Bond Price
Simple Yield: Coupon + amortization / current bond price
How to convert a Yield from 30/360 to act/act
Yield act/act = Yield 30/360 * 365/360
What is the yield to call
It’s the yield on a callable bond, if the call is exercised.
Calculated: N = periods until call, PV = call price,
What is Yield to worst
The yield that is lowest, out of the yield to calls and yield to maturity.
How can you see callable bonds value?
Callable bond value = straight bond value (Option Adjusted Price) - call option value
What is a G Spread?
This is the difference between the yields of a bond and it’s benchmark security, may have to use interpolation if there’s no benchmark bond with the same maturity
What is the I spread (Interpolated Spread)
Calculation: Yield Spread - Spot Rate (Same Currency & Tenor)
(1) First need to calculate the YTM, look at the Spot rate at the specific maturity
(2) -minus the spot rate
The higher the I spread, the more risky the bond is presumed to be in terms of credit risk.
What’s the difference between the Z spread and the G/I spreads?
Z spreads is a constant amount that when added to the benchmark spot rates, produces a value equal to the market price of a bond.
How do you calculate the Z spread?
You need to take the cash flows of the bond
Coupon1 / (1+Spot rate+ZS) + Coupon2 / (1+Spot rate+ZS)^2 + Coupon3 / (1+Spot rate+ZS)^3 = PV
So plug in the numbers to get the PV to equal
What is the Option Adjusted Spread?
Option Adjusted spread is the price of a callable bond without the equivalent option attached
Calculation: Z spread - Option Value
You can add this to the spot rate, and then discount cash flows to find the price of an otherwise equal but non callable bond.
How does the benchmark spot curve relate to the OAS curve?
When you have to perform the relevant discount of cash flows you’ll use the Z spread
For callable bondds, you’ll have an OAS
