Chapter 14 Fixed-Income Active Management

Question 1

Asset swap spread

Answer 1

(ASW) The spread over MRR on an interest rate swap for the remaining life of the bond that is equivalent to the bond’s fixed coupon.

Question 2

Asset swaps

Answer 2

Convert a bond’s fixed coupon to MRR plus (or minus) a spread.

Question 3

Authorized participants

Answer 3

Institutional investors who create and redeem ETF shares using an OTC primary market with an ETF sponsor.

Question 4

CDS curve

Answer 4

Plot of CDS spreads across maturities for a single reference entity or group of reference entities in an index.

Question 5

Conditional value at risk

Answer 5

(CVaR) Also known as expected loss The average portfolio loss over a specific time period conditional on that loss exceeding the value at risk (VaR) threshold.

Question 6

Credit cycle

Answer 6

The expansion and contraction of credit over the business cycle, which translates into asset price changes based on default and recovery expectations across maturities and rating categories.

Question 7

Credit default swap (CDS) basis

Answer 7

Yield spread on a bond, as compared to CDS spread of same tenor.

Question 8

Credit loss rate

Answer 8

The realized percentage of par value lost to default for a group of bonds equal to the bonds’ default rate multiplied by the loss severity.

Question 9

Credit migration

Answer 9

The change in a bond’s credit rating over a certain period.

Question 10

Credit valuation adjustment (CVA)

Answer 10

The present value of credit risk for a loan, bond, or derivative obligation.

Question 11

Default intensity

Answer 11

POD over a specified time period in a reduced form credit model.

Question 12

Default risk

Answer 12

Likelihood that a borrower will default or fail to meet its obligation to make full and timely payments of principal and interest according to the terms of a debt obligation.

Question 13

Discount margin

Answer 13

The discount (or required) margin is the yield spread versus the MRR such that the FRN is priced at par on a rate reset date.

Question 14

Empirical duration

Answer 14

Estimation of the price-yield relationship using historical bond market data in statistical models.

Question 15

Excess spread

Answer 15

Credit spread return measure that incorporates both changes in spread and expected credit losses for a given period.

Question 16

G-spread

Answer 16

Yield spread for a fixed-rate bond over a government benchmark.

Question 17

Green bonds

Answer 17

Fixed-income instruments issued by private or public sector borrowers that directly fund ESG initiatives.

Question 18

Hazard rate

Answer 18

The conditional POD, or the likelihood that default will occur given that it has not already occurred in a prior period.

Question 19

I-spread (interpolated spread)

Answer 19

Yield spread measure using swaps or constant maturity Treasury YTMs as a benchmark.

Question 20

Incremental VaR (or partial VaR)

Answer 20

The change in the minimum portfolio loss expected to occur over a given time period at a specific confidence level resulting from increasing or decreasing a portfolio position.

Question 21

Loss severity

Answer 21

Also known as loss given default (LGD). The amount of loss if a default occurs, usually expressed as a percentage in annual terms.

Question 22

OAS duration

Answer 22

The change in bond price for a given change in OAS.

Question 23

Option-adjusted spread (OAS)AS)

Answer 23

A generalization of the Z-spread yield spread calculation that incorporates bond option pricing based on assumed interest rate volatility.

Question 24

Probability of default

Answer 24

The likelihood that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest.

Question 25

Quoted margin

Answer 25

The yield spread over the MRR established upon issuance of an FRN to compensate investors for assuming an issuer’s credit risk.

Question 26

Reduced form credit models

Answer 26

Credit models that solve for default probability over a specific time period using observable company-specific variables such as financial ratios and macroeconomic variables.

Question 27

Relative VaR

Answer 27

The minimum portfolio loss expected to occur over a given time period at a specific confidence level based on a portfolio containing active positions minus benchmark holdings.

Question 28

Structural credit models

Answer 28

Credit models that apply market-based variables to estimate the value of an issuer’s assets and the volatility of asset value.

Question 29

Value at risk (VaR)

Answer 29

A measure of the minimum portfolio loss expected to occur over a given time period at a specific confidence level.

Question 30

Yield spread

Answer 30

The simple difference between a bond’s YTM and the YTM of an on-the-run government bond of similar maturity.

Question 31

Z-score

Answer 31

Credit risk model that uses financial ratios and market-based information weighted by coefficients to create a composite score used to classify firms based on the likelihood of financial distress.

Question 32

Zero-discount margin (Z-DM)

Answer 32

A yield spread calculation for FRNs that incorporates forward MRR.

Question 33

Zero-volatility spread (Z-spread)

Answer 33

Constant yield spread over a government (or interest rate swap) spot curve.

Question 34

Major Part of Fixed Income Analytical Tools

Answer 34

Inputs, Outputs, User-Defined Parameters