Fixed Income Flashcards
What is the forward pricing model
Arbitrage free - when to do bond strip or reconstitution?
Z-spread
Segmented market theory
Preferred habitat theory
Segmented - yield at each maturity is determined on supply and demand independently of the yields at other maturities (eg pension plans and insurance determine LT bonds)
Preferred habitat - premiums will cause borrowers/lenders to shift from their preferred habitat (maturity range)
Unbiased expectations theory
Local expectations theory
Liquidity preference theory
Unbiased expectations - expectations determine the shape of the interest rate term structure. Risk neutrality (no premium for different maturity strategies .
Local expectations- equal to the one above however risk neutrality only holds for short holding period. There is risk premium for longer maturities.
Liquidity preference - fwd rates are biased estimates of future rates because they include liquidity premium
Structural model strengths and weaknesses
What is term structure and 4 factors it depends on
Calculation of CDS spread
RR - recovery rate
POD - probability of default
What is basis trade (use of CDS)?
How to calculate a CDS upfront premium?
How to calculate the impact of a change in CDS spread after inception?
Factors that influence CDS spread
How to calculate market price of a risky bond?
4 factors that influence term structure
CDS protection buyer profits when CDS rate increase or decrease after inception?
Interest rate path
Trazer fluxos a VP
3 por 2%
3 por (1+2%)x(1+2,8%)
103 por …
What is unbiased expectations theory? (Pure expectations theory)
What is the riding the yield curve strategy?
What is the Vasicek Model?
Properties of binomial interest rate models
Liquidity preference theory
