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CFA > Fixed income > Flashcards

Fixed income Flashcards

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CFA flashcards
1
Q

Number of paths for binomial tree

A

2^(n-1)

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2
Q

Upper node interest rate

A

Lower node interest rate*e^2σ

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3
Q

Lower node interest rate

A

((Upper node interest rate))/e^2σ

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4
Q

P. of bond

A

VND – CVA

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5
Q

CVA

A

PV (Expected loss) = LGD * prob of default*discount factor
Dove–> LGD = VND * (1-Recovery rate)

Prob of default = hazard rate

Sommo tutti i T

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6
Q

VND

puo essere anche semplicemente l’exposure = par value + coupon

A

PV of bond

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7
Q

LGD

A

VND* ( 1- recovery rate)

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8
Q

Prob of survival

A

(1- p of default)^N

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9
Q

Risk neutral default probability P

A

((VND(1-P))+((VND-LGD)(P)/(1+r)

Dove–> LGD = VND * (1-Recovery rate)

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10
Q

CF anno default

A

Exposure – LGD

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11
Q

Δ%P

A

(modified duration of the bond) × (Δ spread)

Se ho anche probability la devo molitplicare ad ogni risultato

Delta spread = credit spread from other letter - credit spread from my letter —> da dove vado a dove sto

E poi sommo tutti i risultati

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12
Q

Credit spread

A

YTM (risky) – YTM (riskfree)

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13
Q

Upfront payment (by prot. Buyer)

A

PV (protection leg) – PV (premium leg)

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14
Q

Upfront premium

A

(CDS Spread – CDS Coupon) * CDS duration

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15
Q

V of capped floater

A

Straight floater value – Embedded cap value

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16
Q

V of floored floater

A

Embedded floor value - Straight bond

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17
Q

Minimum value of convertible bond

A

Greater of conversion value or straight value

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18
Q

Conversion value of convertible bond

A

Stock market price * Conversion ratio

dove conversion ratio = n. of common shares for which a convertible bond can be exchanged

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19
Q

Market conversion price

A

Market bond price / Conversion ratio
Conversion ratio = Par value / Conversion price

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20
Q

Market conversion premium per share

A

Market conversion price – Stock’s market price

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21
Q

Owning stock or Equity

A

Value of long call = max (S-K)

22
Q

Owning debt

A

Value of short put = min (K-S)

23
Q

Swap spread

A

Swap rate - treasury yield

info on supply and demand –> swap rate - treasury yield

24
Q

TED sread

A

3 monts MRR - 3 months T bill rate

info on credit risk in the economy–> 3 months MRR rate - 3 months T bill rate

25
Q

Cosa indica MRR OIS spread

A

MRR rate - overnight rate

well being of banking system –> low spread 0 high liquidity–>MRR rate - overnight spread

26
Q

OAS

A

credit and liquidity risk
when volatility ↑, computed OAS for callable bond ↓ and putable bond ↑

o Callable –> if volatility increase –> OAS decrease–>
o Putable –> if volatility increase –> OAS increase–>

27
Q

cosa indica structural model

A

o explain why default occurs
o Estimation of default barrier and default occurs if the value of firms assets are below this barrier
o They require info of company –> Default is an endogenous variable (inside the company)
o Option pricing theory
o Use traded market price

28
Q

Cosa indica Reduced model

A

o explain when default occurs
o Default = exogenous variable
o Parameter estimation: Default intensity
o Useful for Off-BS
o The probability of default (default intensity) and the recovery rate depend on the state of the economy and are not constant.
o Use historical variables (financial ratios and macroeconomic variables) known by everyone

29
Q

V of callable bond

A

v straight bond - v call

30
Q

V putable bond

A

V straight bond + v put

31
Q

Flat yield curve- cosa indica?

A

all spot = all forwards –> expect decrease in inflation

32
Q
  • If expectation of Upward sloping credit curve - cosa indica?
A

expectation of recession reduce duration of pf
*

33
Q

Perchè Swap rate curve preferita?

A

o Swap rates reflect the credit risk of commercial banks rather than governments.
o The swap market is not regulated by any government.
o The swap curve typically has yield quotes at many maturities  indicates the premium for time value of money at different maturities.
o Institutions like wholesale banks use swap curves to value their assets and liabilities.
o Indicate time value of money

34
Q
  • Unbiased expectations th
A

o Forward rates = unbiased predictor of future spot rates.
o Interest rates expected to increase in future
o Upward sloping yield curve = int rates are expected to increase in the future
o Forward = Break even rate = investor is indifferent between investing for the full term of their investment horizon or investing in part of the horizon and rolling the investment over at the “break-even” forward rate for the remainder of the term.

35
Q
  • Local expectations th
A

o In the short term= risk-free rate.
o In the long term = risk premium

36
Q
  • Liquidity preference th
A

o Longer maturity = higher liquidity premium
o Current forward rate > Future spot rates

37
Q
  • Segmented markets th
A

interactions of supply and demand for funds in different market (i.e., maturity) segments.
o Interest rate are determined by supply/demand for a given maturity sector–> High demand = Lower interest rates

38
Q
  • Preferred habitat th
A

market participants will deviate from their preferred maturity habitat if compensated adequately.

39
Q

Effective duration

A

[(PV-) – (PV+)] / (2 x (curve change) x (PV0))

40
Q

o economic expansions–> effect on yield curve

A

rising inflation cb increase ST rates  bearish flattening of the yield curve. L’economia va bene in trentino e rispondono con gli orsi

41
Q

o recessionary times

A

 cb reduce st rates  bullish steepening. l’economia va male in spagna e rispondono con I tori

42
Q

o market turmoil

A

reduce LT government bond yields  bullish flatteningLT bullet is appropriate non si capisce niente in turmoil il toro impazzisce e si sdraia

43
Q
  • Equilibrium Term Structure Models
A

mean reversion

Cox-Ingersoll-Ross (CIR) = volatility varies with rates (aggiungo la σ√r)
Vasicek model. volatility in this model does not increase as level of interest rates increase
44
Q

o Arbitrage-free models

A

bonds in the market are correctly priced
 Ho-Lee model–>time-dependent drift; noise component
 Kalotay-Williams-Fabozzi–>constant volatility

45
Q

Gauss + model

A

LT rate / volatility depends on macroec. variables (economy inflation…) and is mean reverting

46
Q

stripping

A

o If the principle of value additivity does not hold
buying a bond and then selling off its parts

47
Q

 reconstitution

A

buying the parts to sell a reconstituted bond

48
Q

When is convexity positive or negative

A

o Straight and putable bonds = positive convexity.
o Callable bonds = positive convexity when rates are high. However, at lower rates, callable bonds =negative convexity.

ricorda disegno

49
Q
  • ABS
A

o RISKS: Operational and counterparty risk of servicer
o Short term granular and homogenous vehicles are evaluated using statistical based approach
o Medium term and homogenous obligations are evaluated using portfolio based approach
o Credit enhancement and distribution waterfall relevant characteristics
o Credit rating agencies do not use same credit ratings for ABS as corporate debt

50
Q

Effective duration

A

((PV-) - (PV+)) / (2* curve change * PV0)

51
Q

Duration theory

A

o Callable bonds –> lower one sided down duration than one sided up duration
o Putable bonds –> higher one sided down duration than one sided up duration
o Callable bond –>high duration (perchè non viene chiamata) when low coupon and high yield
o Putable bond –>high duration when high coupon and low yield

52
Q

credit spread

A

o La credit spread term può essere o positive o flat
o Più è alto il rating più è flat la curva del credit spread
o Economia va bene –> credit spread diminuisce
o Securities with lower credit quality –> greater sensitivity to credit cycle
 Portfolio based approach –> a lot of small loans very dynamic
 Loan-by loan approach –> few big loans
 Statistics based approach –> for static loans

CFA (9 decks)

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