Chapter 8 Fixed Income Securities Analysis Flashcards
Bond value
present value of expected future cash flows
n - years x payments
i - comparable bond
PMT - 1 coupon pmt
FV - face
Solve for PV
YTM
PV - current bond price
N - years x payments per year
PMT - 1 coupon payment
FV - face value
solve for i
current yield
annual coupon in dollars/current market price
Discount bond yields order - most to least
YTM
Current yield
Coupon rate
Premium bonds yield order - most to least
coupon rate
current yield
ytm
Yield to call
PV - current price
N - years to call x payments per year
PMT - one coupon payment
FV - face plus call premium
solve for i
Duration
time-weighted measure of a fixed income security’s clash flows in terms of payback - measure bonds volatility
inverse relationship with coupon rate
direct relationship with maturity
inverse relationship with YTM
immunization
concept of minimizing the impact of changes in interest rates on the value of the investment
Portfolio Duration
weighted average of the durations for the bonds included in the portfolio
barbell strategy
1/2 of the portfolio is invested in shorter-term bonds, while the other 1/2 is invested in longer term bonds
Bullet strategy
purchase a series of bonds with similar maturities that are focused around one point in time
Substitution swap
exchanges bonds with identical characteristics selling for different prices
Intermarket spread swap
Exchange of similar bonds from two different market sectors to capitalize on the spread between two similar bonds
Rate anticipation swaps
tax advantage of expected changes in market interest
Pure yield pickup swap
increase the yield through a swap such as trading a lower yielding bond for a higher yielding bond
