Chapter 8 Flashcards
Mac Du is a mesure of
Volatility, the higher the Mac Du, the more volatil
Strip bond Mac Du =
Maturity
Horizon analysis
Period of the life of the bond when interest change
Contingent immunization
Need to monitor the cost to purchase an appropriate strip bond
Index most replicated for bonds
FTSE TMX Global Debt Capital Market
Mod Du formula
Mac Du/(1+(yield/payment per year))
Intramarket
4 transactions with Canada and US issuers
Intermarket
2 canadian bond issuers
Ride the yield curve
When no change in the interest rate
Tracking error minimisation
Relies on historical data and focus on replicating an index’s return
Low coupon bonds
Are affected more by rate changes
3 ways duration can be used
- Compute the effective average maturity
- Help immunize against interest rate sensibility
- Mesure how the bond (or portfolio) is to change on interest rate
A Box trade
Two swaps, 4 transactions
Bond swap
Buy and sell bonds related or not
Duration composants
Maturity and coupon rate
Stratified sampling isssues
Matching some cells and ignores the correlation between cells
Box trade
2 swaps, 4 bonds same two issuers and no change in the duration, risk exposure and amount invested
A rate anticipation swap is?
Switching funds from one end of the yield curve to another
Strategy used to replicate an index with bonds with representative bonds in each cell with same proportion
Stratified sampling
Fixe income traders at broker dealers focus on
Absolute performance
2 components on interest rate risk
Price risk and reinvestment risk
Strategy used to replicated an index by replicating the attribures of an index
Cellular sampling, portfolio is broken into cells: TTM, coupon rate, credit risk
3 attributes of a bond using stratified sampling
TTM, credit rating and coupon rate
Deep discount have
Long maturity and low mod du
