Debt: valuation Flashcards

1
Q

credit ratings factors

A

> default
payment priority
projected recovery
financial stability

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2
Q

gross redemption yield

A

flat yield + profit yield

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3
Q

flat yield (return from coupons)

A

gross annual coupon/ market price *100%

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4
Q

profit yield

A

(profit(or loss)/ n)/ market price

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5
Q

bond trading above par and below par

A

GRY < Flat yield < coupon
GRY > Flat yield > coupon

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6
Q

net redemption yield

A

income tax on coupon
not tax payable on gain

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7
Q

net coupon

A

gross coupon*(1-t)

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8
Q

grossed up net redemption yield
compares assets with different tax treatments

A

NRY / (1-t)

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9
Q

Interest rate effect on bonds can lead to

A

shift (increase or decrease in yields) or twist (change of shape of curve)

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10
Q

ex-coupon date (cannot receive next coupon payment)

A

7 business days
dirty price less than clean price
clean price = dirty price on coupon payment date

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11
Q

dirty price =

A

clean price on coupon payment date

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12
Q

duration

A

sum(PV of cf * time to CF)/sum(PV of cf)

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13
Q

modified duration (change in price for a 1% change in yield)
> assumes linear
> over estimates price falls
> under estimates price rises

A

D / (1+r)

changeinprice = -MD * change in r * bonds current price

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14
Q

upward sloping yield curve

A

forward rate > spot rate > GRY (weighted avg of Forward rate and spot rate)

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15
Q

downward yield curve

A

forward rate < spot rate < GRY

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16
Q

MODIFIED DURATION

A

linear assumtion between price and yield
estimated price for bond lower than the actual new price
difference small for smaller change in yields
less accurate for larger changes in yields

17
Q

estimating forward rates

A

(1+a)*(1+b)=(1+c)

18
Q

annuity

A

P= coupon*1/r(1-1/(1+r)^n) + capital/(1+r)^n

19
Q

S&P investment grade

A

AAA
AA
A
BBBB
AAA CC D not subdivided

20
Q

Moody’s investment grade

A

Aaa
Aa
A
Baa
Aaa C not subdivided

21
Q

for credit risk review

A

financial statement analysis, capital structure, leverage and asset protection
macroeconomic forecasts
industry trends
regulatory developments
bond’s covenant
PBIT/interest payable
operating income/sales
interest-bearing debt/ordinary shareholders funds

22
Q

GRY cannot be calculated for

A

undated stocks
warrant stocks

23
Q

total return

A

ytm + interest rate + sector/quality + residual effect

24
Q

decomposing yields

A

shift return:
changes in the level of the yield curve.
yields increase or decrease by the same amount across all maturities
twist return:
change in slope of yield
yield curve to steepen buy short-dated bonds and sell long-dated
spread return:
generated through taking bonds different to benchmark

25
Q

trading at par

A

yield to maturity = coupon rate

26
Q

bearer bonds do not have

A

ex coupon periods

27
Q

immunisation

A

time the duration of the portfolio to the maturity of the liability

28
Q

macualay duration of a zero coupon bond

A

equal to its maturity

29
Q

yield curves

A

normal – liquid assets near dated bonds
humped – lots of mini markets
downward (inverted) – long -dated bonds (higher demand)