Book 4_Fixed_READING 55_YIELD-AND-YIELD-SPREAD-MEASURES-FOR-FIXED-RATE-BONDS

Question 1

The effective yield of a bond

Answer 1

depends on its periodicity, or frequency of coupon payments.

Question 2

For an annual-pay bond

Answer 2

the effective yield is equal to the yield to maturity (YTM)

Question 3

For bonds with greater periodicity

Answer 3

the effective yield is greater than the YTM.
Annual yield = (1 + YTM/n)^n - 1

Question 4

the yield to maturity (YTM)

Answer 4

is the discount rate that makes the present value of a bond’s cash flows equal to its price.

Question 5

A YTM quoted on a semiannual bond basis

Answer 5

is two times the semiannual discount rate.

Question 6

Bond yields that follow street convention

Answer 6

use the stated coupon payment dates

Question 7

A true yield

Answer 7

accounts for coupon payments that are delayed by weekends or holidays and may be slightly lower than a street convention yield

Question 8

Current yield

Answer 8

= Annual cash coupon/bond price

Question 9

Simple yield

Answer 9

= (Annual cash coupon+straight-line amortization of a discount/premium)/bond price

Question 10

For a callable bond, a yield to call may be calculated

Answer 10

• using each of its call dates and prices.
• The lowest of these yields or its YTM is a callable bond’s yield to worst. (when maturity)

Question 11

an option-adjusted yield

Answer 11

• which represents the yield that the bond would be offering if it were not callable. (“removing” the option)
• Straight bond value = callable bond value + call option value

Question 12

A yield spread or benchmark spread

Answer 12

is the difference between a bond’s yield and a benchmark yield or yield curve
- If the benchmark is a government bond yield, the spread is known as a government spread or G-spread.
- If the benchmark is a swap rate, the spread is known as an interpolated spread or I-spread (interbank rate)

Question 13

A zero-volatility spread or Z-spread

Answer 13

is the percentage spread that must be added to each spot rate on the benchmark yield curve to make the present value of a bond’s cash flows equal to its price

Question 14

An option-adjusted spread (OAS)

Answer 14

• is used for bonds with embedded options and represents the spread the bond would offer if it had no embedded options.
• For a callable bond, the OAS is equal to the Z-spread minus the call option value in basis points.