Fixed inc

Question 1

PVfull

Answer 1

PVfull = PVflat + Accrued Interest

Question 2

Periodicity

Answer 2

(1+APRm/m)^m = (1+APRn/n)^n

Question 3

Discount basis

Answer 3

Pv=Fv(1-t/T DR)

Disc rate = t/T[(fv-pv)/fv]

Question 4

Add on basis

Answer 4

Pv = fv/ (1+t/T AOR)

AOR = T/t[(fv-pv)/pv)]

Question 5

Forward curve

Answer 5

2y1y
When what
2 year bond for 1 year

(1+r1)(1+implied forw rate)=(1+r2)^2

Question 6

Types of yield

Answer 6

True yield - weekends not included
Current yield - annual PMt/PVflat
Simple yield - (ann pmt+st amort of gain/loss)/PVflat
Float Rate Note - coupon tied to libor

Question 7

Libor

Answer 7

Libor + Quoted Margin (QM) - issuer (spread) + discount margin(DM) - market

pV = [(Libor + Qm) x Fv)/2]/m/[1+ ((Libor+DM)/m)]^n

I/y = libor + dm / n

Question 8

Properties of a bond

Answer 8

Longer bond - more volatile

Lower pmt - more volatile

Question 9

Macalay Duration

Answer 9

Ęweighted CF/ PVfull

Shows how long we have to keep bond so extra valuation offset the loss of reinvestmnt

Question 10

Modified Duration
And
Approx Mod Dur

Answer 10

Annualized Macalay Dur/ (1+r)

Approx mod dur = pv- - pv+ / 2xchange in yield x PVo

Question 11

Effective Duration

Answer 11

Pv- - Pv+ / 2xchange in curve xPVo

Curve is sensitive to benchmark yield (govt, spot, par)

Question 12

Key rate Duration

Answer 12

Pv- - Pv+ / 2x change in rate xPVo

Duration at specific maturity of the yield curve to get %change in portfolio value

ĘKey Rate Dur = Eff Dur

Question 13

Properties of Duration

Answer 13

Longer Time to Maturity leads to longer Duration
Lower coupon leads to longer Duration
Lower Yield to Maturity longer Duration

But its all subject to interest rate risk

Question 14

Money Duration

Answer 14

Annual Modified Duration x PVfull

Question 15

PVfull

Answer 15

PVfull= -money Duration x change in Yield

Question 16

If 2 bonds all equal but one has lower coupon, which one is more price volatile?

If 2 bonds all equal but one has longer time to Maturity , which one is more price volatile?

Answer 16

Pmt lower more volatile

Ttm longer more volatile

Question 17

PV per Basis Point

Answer 17

Pv- -PV+ /2

Question 18

Convexity adjustment

Annual convexity

Answer 18

Pv- + Pv+ - 2PV / PVo (yield)^2

Question 19

%change in PV full

Answer 19

(-annual Mod Dur x change in yield) + (1/2 money convexity x (yield)^2)

Question 20

Change in PV full

Answer 20

(-Money Duration x change in yield) + (1/2 money convexity x (yield)^2)

Question 21

Single Month Maturity Rate

Answer 21

Smm = monthly prepmt/beg amount - pmts

Question 22

Prepmt amount

Answer 22

Smm x (end balance - pmts)

Question 23

CPR

Answer 23

1- (1-smm)^12

Question 24

What happens with ABS if int rates decr?

What if rates incr?

Answer 24

Refinance incr, prepmt incr, Psa incr, av life decr. Contraction risk

Refinance decr, prepmt decr, psa decr, av life incr. extension risk

Question 25

Fully amort bond

Answer 25

Pmi + interest

Question 26

Partially amort bond

Answer 26

Int + pmt + baloon pmt at Maturity

Question 27

Callable bonds

Answer 27

Called at = pv of (int+fv)/govt ytm + spread If interest rate drops company calls the bond

Question 28

Convertable bonds

Answer 28

Conversion Ratio = Fv/ convert prixe Conversion Val = Stock price x conv ratio Conversion premium = BOnd Price - (stock price x conv ratio) Conversion parity = B = (StP x ratio)

Question 29

Warrants

Answer 29

Are not an embedded option

Question 30

Credit enhancement

Answer 30

Internal - subordination (issue 85% senior, 15% junior) - over collateralization ( put more collateral than tot FV of the bonds) - excess spread External - surety bond(issued by insurance comp)/ guarantee(issued by a bank) - letter of credit

Question 31

Time tranche

Answer 31

Each receives interest but principal goes a1 then a2 and so on Redistributes prepmt risk

Question 32

Collateriz Mortgage oblig

Answer 32

CMO only can do a time tranch To protect from estension risked Has non agency credit risk To avoid it can do internal credit enhancement: Credit tranch, build a reserve fund, overcollaterize Or do external credit enhancement - get a guarantee

Question 33

Rmbs

Answer 33

Loan to value ratio = mortgage/ property value Credit quality of a mortgage holder is important

Question 34

Planned Anort Class (pac)

Answer 34

Offers contract and extension risk | But support tranche gets all the risk

Question 35

Cmbs prepmt risk

Answer 35

Non-recourse loan!! Almost avoided by prep lockout Prepmt penalty points Yield maint charge