Fixed Income Flashcards
Expected Loss
Probability of Loss x Loss Given Default x Exposure
Formula for Spread
Probability of Default x Loss Given Default
Does Probability of default change according to the lien of the issuer?
No - probability of default is for the issuer. It does not change depending on the lien of the bond
Why do we get negative empirical duration for junk bonds?
economy recovers and rates rise, bond prices should fall, but the fall in spread dominates, because of which prices also end up rising and due to positive relationship between rise in rates and rise in prices, we get a negative empirical duration
Benchmark Spread
Corporate Bond Yield - Nearest OTR Bond Yield
Irrespective of the maturity of the OTD Bond Yield
G-spread
Compares corporate bond yield to interpolated yield of the two bracketing OTR government bonds
I-Spread
compares to interpolated yield of swap fixed rates
QM and DM, whats the formula for Coupon
MRR + QM
QM and DM, whats the formula for YTM
MRR + DM
Which of the 2 changes? QM or DM
At initiation, DM = QM
Later, DM changes
Duration Times Spread
Effective spread duration x spread
% change in spread
= change in spread in bps / OAS in bps
Estimated portfolio change value using DTS
DTS x % change in Spread
or Effective spread duration x change in spread
Expected Excess Return
Spread - (effective spread duration x change in spread ) - (PD x LGD)
Effective spread
Buy: Trade size * (trade price - mids)
Sell: Trade size * (Mids - trade price)
