Bonds

Question 1

What are the zero rates of bonds?

Answer 1

Treasury buys coupon bonds, and they synthetically resell them to create ZCB

Think of a coupon bond as a portfolio of zero coupon bonds with different interest rates

Question 2

What is the yield curve or term structure?

Answer 2

A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt

Question 3

What is the yield to maturity?

Answer 3

The interest rate used to discount the cashflow so that the PV equals the bond price.

Average of all the interest rates

Question 4

What is the part yield?

Answer 4

The coupon rate that makes the bond price equal to the face value

Question 5

What is so special about the futures on bonds?

Answer 5

The short delivers can deliver any of a list of 10 or 20 treasury bonds, with different interest rates. The idea is to avoid a run on government bonds; cause liquidity issues.

The short delivers should be indifferent to all bonds.

Question 6

What are the two dates involved in a futures contract?

Answer 6

One is the delivery date (when the future contract is delivered); One is the time to maturity (from future to the actual maturity)

This makes sense. Compare to other securities, the value of bonds lies within the bond - till it matures. It doesn’t make sense to get a bond when it matures.

Question 7

How is bond’s price presented?

Answer 7

Bond is presented as a percentage of the par = 100,000;

Basis of 32;

Bond’s price changes when interest rate goes up.

Question 8

What is Eurodollar?

Answer 8

Dollars are international currency; short-term interest rate from depositing US Dollars in countries abroad (LIBOR); it is essentially another form of bond

Eurodollar - quoted differently, 25 dollar; 4 quarters; 90 days;