Debt: valuation

Question 1

credit ratings factors

Answer 1

> default
payment priority
projected recovery
financial stability

Question 2

gross redemption yield

Answer 2

flat yield + profit yield

Question 3

flat yield (return from coupons)

Answer 3

gross annual coupon/ market price *100%

Question 4

profit yield

Answer 4

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

Question 5

bond trading above par and below par

Answer 5

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

Question 6

net redemption yield

Answer 6

income tax on coupon
not tax payable on gain

Question 7

net coupon

Answer 7

gross coupon*(1-t)

Question 8

grossed up net redemption yield
compares assets with different tax treatments

Answer 8

NRY / (1-t)

Question 9

Interest rate effect on bonds can lead to

Answer 9

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

Question 10

ex-coupon date (cannot receive next coupon payment)

Answer 10

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

Question 11

dirty price =

Answer 11

clean price on coupon payment date

Question 12

duration

Answer 12

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

Question 13

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

Answer 13

D / (1+r)

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

Question 14

upward sloping yield curve

Answer 14

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

Question 15

downward yield curve

Answer 15

forward rate < spot rate < GRY

Question 16

MODIFIED DURATION

Answer 16

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

Question 17

estimating forward rates

Answer 17

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

Question 18

annuity

Answer 18

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

Question 19

S&P investment grade

Answer 19

AAA
AA
A
BBBB
AAA CC D not subdivided

Question 20

Moody’s investment grade

Answer 20

Aaa
Aa
A
Baa
Aaa C not subdivided

Question 21

for credit risk review

Answer 21

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

Question 22

GRY cannot be calculated for

Answer 22

undated stocks
warrant stocks

Question 23

total return

Answer 23

ytm + interest rate + sector/quality + residual effect

Question 24

decomposing yields

Answer 24

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

Question 25

trading at par

Answer 25

yield to maturity = coupon rate

Question 26

bearer bonds do not have

Answer 26

ex coupon periods

Question 27

immunisation

Answer 27

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

Question 28

macualay duration of a zero coupon bond

Answer 28

equal to its maturity

Question 29

yield curves

Answer 29

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