Unit 13: Fixed Income Flashcards

1
Q

Long-term debt duration

A

minimum of 5 years, but usually 20-30 years

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2
Q

Who are the 3 major issuers of fixed income?

A
  1. U.S. government
  2. Corporations
  3. State governments/municipalities
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3
Q

Par/face value is always

A

$1,000

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4
Q

Bond pricing for corporations and municipalites

A

quoted as a % of par

1/8 = $1.25
1/4 = $2.50
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5
Q

Bond pricing for government

A
  • quoted in points
    90. 8 = $902.50

.8 means 8/32

Each .1 represents 1/32 of $10 = ($0.3125)

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6
Q

Treasury Inflation Protection Securities (TIPS)

A
  • Helps protect investors against purchasing power risk
  • Issues with a fixed interest rate, but the principal amount is adjusted semiannually
  • Interest payments and increases in principal are subject to federal tax only
  • Real rate of return will always be the coupon
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7
Q

S&P’s investment grade ratings:

A

AAA, AA, A, BBB

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8
Q

Moody’s investment grade ratings:

A

Aaa, Aa, A, Baa

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9
Q

Key points about convertible securities:

A
  • They give the owner the opportunity to participate in the company’s growth through the ability to acquire common stock
  • The coupon rate will be lower than non-convertibles of the same quality. (If a question asks about choosing an investment for income, you don’t select the convertible security.)
  • They offer the potential stability of a debt security with the upside potential of an equity security
  • Convertible securities generally sell at a price somewhat above the parity price
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10
Q

Nominal Yield

A

coupon rate, a 5% coupon rate pays $50 per year (2 payments of $25)

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11
Q

Current yield

A

annual interest in dollars / current market price

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12
Q

Yield to Maturity/Basis

A

annual interest - (premium/years to maturity)
/
average price of the bond

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13
Q

YTM is also called:

A

the market-driven yield because it reflects the internal rate of return from the bond investment.

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14
Q

The longer the duration,

A

the greater the market price movement.

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15
Q

The duration of a zero-coupon bond will always:

A

equal its length to maturity.

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16
Q

The longer a bond’s maturity,

A

the longer the bond’s duration.

17
Q

For coupon bonds, duration is always

A

less than the bond’s maturity.

18
Q

The longer a bond’s duration,

A

the more its value will change for a 1% change in interest rates.

19
Q

Convexity

A

the measurement of the curve that results when plotting a bond’s price movements in response to changes in interest rates

convexity follows a curve

20
Q

Comparing two bonds, the one with the higher convexity will show:

A

a greater price increase when yields fall.

21
Q

If we find two bonds with the same duration, the one with the higher convexity offers

A

greater interest rate risk protection.

22
Q

Which of the following is the most useful in determining the price volatility of a bond to a significant change in interest rates?

A

Convexity

23
Q

Discount Cash Flow

A

Estimate the value of a fixed-income security by looking at the future expected cash flow and discounting it to arrive at a present value.

24
Q

The higher the discounted cash flow,

A

the more value the investment.

25
Q

An analyst would use the discounted cash flow method in an attempt to find:

A

the fair value of a security

26
Q

When doing cash flow analysis on a mortgage-backed pass-through security,

A

you would want to know the average maturities.