Chap 7: Fixed income pricing and trading Flashcards
Three theories that attempt explain the shape of the yield curve are the…..
Expectations Theory,
Liquidity Preference Theory
Market Segmentation Theory
This theory says that current long-term interest rates foreshadow future short-term rates. According to this theory, investors buying a single long-term bond should expect to earn the same amount of interest as they would buying two short-term bonds of equal combined duration. The theory implies that the shape of the yield curve indicates investor expectations about future interest rates.
Expectations Theory
The _________ theory holds that an upward sloping yield curve indicates an expectation of higher rates in the future, whereas downward sloping curve indicates that rates are expected to fall.
Expectations Theory
According to the ________, investors prefer short-term bonds because they are more liquid and less volatile in price. An investor who prefers liquidity will venture into longer-term bonds only if there is sufficient additional compensation for assuming the additional risks of lower liquidity and increased price volatility.
liquidity preference theory
The __________postulates that the yield curve represents the supply of and demand for bonds of various terms, which are primarily influenced by the bigger players in each sector. This theory can explain all types of yield curves, including normal, upward-sloping curve, and inverted (downward sloping) curve, and a humped curve.
market segmentation theory
This theory does not explain a flat or downward sloping yield curve.
Liquidity Preference Theory
This theory can explain all types of yield curves, including normal, upward-sloping curve, and inverted (downward sloping) curve, and a humped curve.
Market Segmentation Theory
The terms ______ and _______ are often used interchangeably, with both meaning a rate of return on an investment.
Interest Rate and Bond Yield
Therefore, as interest rates rise, bond yields _______, but bond prices fall.
also rise
As interest rates fall, bond prices _____
Rise
As bond prices rise, bond yields ______
Fall
As interest rates fall, bond yields ______
Fall
Remember that the _____ rate does not change over the life of the bond
Coupon
______ -term bonds are more volatile in price, therefore their prices are more sensitive to interest rates
Long term
______ coupon bonds are more volatile in price, therefore, their prices are more sensitive to interest rates.
Lower
_______ yielding bonds are more volatile in price, therefore, their prices are more sensitive to interest rates.
Lower
If we expect interest rates to increase, what type of bonds do we want to be in?
Short term bonds with higher coupons because they are less volatile
If we expect interest rates to decrease, what type of bonds do we want to be in?
Long term bonds with lower coupons because they are more volatile
The ______ the duration, the more volatile the price
Higher
As bonds approaches maturity over the years, they become _______ volatile.
Less
______-term bonds are more volatile in price than ______-term bonds.
Longer-term, Shorter-term
Bond prices are more volatile when interest rates are _____
Low
If interest rates are expected to rise, buy ______ duration bonds.
Low
If interest rates are expected to fall, buy ______ duration bonds
High
The calculation that combines the impact of both the coupon rate and the term to maturity is called
Duration
The ____ side of fixed income trading is the investment dealer side.
Sell
_____side services include everything related to creating, producing, distributing, researching, marketing, and trading fixed income products.
Sell
_______side institutions are concerned with the trading (i.e. the buying and selling) of investment products for their own accounts.
Sell
The ____ side of fixed-income trading is the investment management side
Buy
____side institutions are concerned with asset management and are typically engaged in the buying and holding of securities on behalf of their institutional clients
Buy
Most buy-side firms divide fixed-income investment management duties into two primary occupational roles:
Portfolio Management
Trading
_______are participants in the wholesale bond market (I.E. the bond market between the institutional buy side and sell side). These brokers act solely as agents, bringing together institutional buyers and sellers in matching trades (rather than institutions dealing directly with one another).
Inter-dealer Brokers
A key advantage the inter-dealer broker provides for institutional clients is _____
anonymity
The ______ is an electronic confirmation sent through secure, proprietary systems.
trade ticket
These securities do not have to be delivered until the end of what is called the_______ , when payment is made.
settlement period
Other securities, such as bonds, debentures, certificates of indebtedness, preferred shares, and common shares settle on the ____ clearing day after the transaction takes place
second
_______ settle on the day of the transaction
T-bills
Best know Canadian Bond Market Index
FTSE Canada Universe Bond Index
The most accurate method to determine the value of a bond is to calculate the ______
Present Value
N stands for
of payment periods
I/Y stands for
Interest rate I want. Discount Rate, Interest Rate
PMT stands for
Coupon payment per period
_______=(100-Price)/Price x 365/Term
Yield of a T-bill
_____________=(annual cash flow)/(current market price)
Current yield on a bond
The risk that the coupons will earn a return at a lower overall rate than the rate that prevailed at the time the bond was purchased is called
Reinvestment Risk
Zero Coupon bonds, or strip bonds have _______ reinvestment risk
NO
