Chapter 8: Fixed-Income Securities - Analysis Flashcards
What is the slope for a NORMAL yield curve?
upward sloping
What is the slope for an INVERTED yield curve?
downward sloping
What does a normal yield curve indicate about the yields of bonds?
the normal yield curve indicates that yields on long-term bonds are higher than yields on short-term bonds
What does an inverted yield curve indicate about the yields of bonds?
the inverted yield curve indicates that yields on long-term bonds are lower than yields on long-term bonds
Current Yield Calculation
Annual Coupon payment in dollars
/
Current market price
Call Risk
The risk that the bond will be called from the investor.
reinvestment rate risk
the risk that cash flows cannot be invested at a rate as great as the rate earned by the original investment.
Purchasing power risk
the risk that inflation will erode the purchasing power of an investor’s assets
exchange rate
risk associated with fluctuations in currency rates
liquidity risk
greater if the spread between the bid and ask prices for a security is larger
There is a ____________ relationship betwen a bond’s coupon rate and its duration.
Inverse
A longer term bond is more volatie than a _______ term bond
shorter
There is _____________ relationship between a bond’s Yield to Maturity (YTM) and duration.
Inverse
when YTM is increased on a coupon bond, the duration will….
decline
what is the calculation for duration?
what are the advantages of indexing the portfolio (4)?
diversification
lower management costs
reduced transaction costs
better performance
what are the 3 most common Active Strategies for bond?
- Ladder Strategy
- Barbell Strategy
- Bullet Strategy
substitution swap of bonds
exchanging bonds with identical characteristics selling for different prices.
intermarket swap of bonds
exchanging similar bonds from two different markets.
what is the goal of the intermarket swap?
to capitalize on the spread between two similar bonds.
rate anticipation swap of bonds
takes advantage of expected changes in market interest rates
tax swaps
motivated by making use of unrecognized capital losses. must be careful to avoid a wash sale with a tax swap.
Pure yield pickup swap
designed to increase the yield through a swap, such as trading a lower-yielding bond for a higher-yielding bond.
