CFA 55: Understanding Fixed-Income Risk and Return Flashcards
horizon yield
Sources of Return
The internal rate of return between the total rate return (the sum of reinvested coupon payments and the sale price or redemption amount) and the purchase price of the bond. The horizon yield on a bond investment is the annualized holding-period rate of return.
carrying value
Sources of Return
The purchase price plus the amortized amount of the discount if the bond is purchased at a price below par value. If the bond is purchased at a price above par value, the carrying value is the purchase price minus the amortized amount of the premium.
yield duration
Interest Rate Risk on Fixed-Rate Bonds
The sensitivity of of the bond price with respect to the bond’s own yield-to-maturity.
curve duration
Interest Rate Risk on Fixed-Rate Bonds
The sensitivity of the bond price (or more generally, the market value of a financial asset or liability) with respect to a benchmark yield curve. The benchmark yield curve could be the government yield curve
Macaulay Duration (theory) Interest Rate Risk on Fixed-Rate Bonds
The approximate amount of time a bond would have to be held for the market discount rate at purchase to be realized if there is a single change in interest rate. It indicates the point in time when the coupon reinvestment and price effects of a change in yield-to-maturity offset each other.
effective duration
Interest Rate Risk on Fixed-Rate Bonds
The sensitivity of the bond’s price to a change in a benchmark yield curve. The difference between approxiamte modified duration and effective duration is the in the denominator. Modified duration is a YIELD duration statstic in that it measures interest rate risk in terms of a change in the bond’s own yield-to-maturity (deltaYield). Effective duration is a CURVE duration statistic in that it measures interest rate risk in terms of a parallel shift in the benchmark yield curve (deltaCurve).
key rate duration (partial duration)
Interest Rate Risk on Fixed-Rate Bonds
A measure of a bond’s sensitivity to a change in the benchmark yield curve at a specific maturity segment. In contrast to effective duration, key rate durations help identify “shaping risk” for a bond - that is, a bond’s sensitivity to changes in the shape of the benchmark yield curve (i.e. the yield curve becoming steeper or flatter).
cash flow yield
Interest Rate Risk on Fixed-Rate Bonds
The internal rate of return on a series of cash flows, usually used on a complex security such as a mortgage-backed bond (using projected cash flows based on a model of prepayments as a result of refinancing) or a portfolio of fixed-rate bonds.
parallel shift
Interest Rate Risk on Fixed-Rate Bonds
A parallel yield curve shift imples that all rates change by the same amount in the same direction. In reality, interest rate changes frequently result in a steeper or flatter yeild curve.
money duration
Interest Rate Risk on Fixed-Rate Bonds
A measure of the PRICE CHANGE in units of the currency in which the bond is denominated. The money duration can be stated per 100 of par value or interns of the actual position size of the bond in the portfolio.
price value of a basis point (PVBP)
Interest Rate Risk on Fixed-Rate Bonds
An estimate of the change in the full price given a 1 bp change in the yield-to-maturity.
convexity adjustment
Interest Rate Risk on Fixed-Rate Bonds
Convexity adjustment is the annual convexity statistic, AnnConvexity, times one-half, multiplied by the change in the yield-to-maturity SQUARED. This additional term is a positive amount on a traditonal (option-free) fixed-rate bond for either an increase or decrease in the yield.
money convexity
Interest Rate Risk on Fixed-Rate Bonds
For a bond, money convexity is the annual or approximate convexity multiplied by the full price.
effective convexity
Interest Rate Risk on Fixed-Rate Bonds
The effective convexity of a bond is a CURVE CONVEXITY statistic that measures the secondary effect of a change in a benchmark yield curve.
term structure of yield volatility
Interest Rate Risk on Fixed-Rate Bonds
The term strucutre of yield volatility is the relationship between the volatitlity of bond yields-to-maturity and times-to-maturity.
Example: A central bank engaging in expansionary monetary policy might cause the yield curve to steepen by reducing short-term interest rates. But this policy might cause greater VOLATILITY in short-term bond yields-to-maturity than in longer-term bonds, resulting in a downward-sloping term structure of yield volatility. Longer-term bond yields are mostly determined by future inflation and economic growth expectations. Those expectations often tend to be less volatile.
