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CFA Level 1: Asset Valuation > Fixed Income > Flashcards

Fixed Income Flashcards

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CFA flashcards
1
Q

Current Yield

A

= annual cash coupon payment / bond price

Disc: CPN < current yield < YTM
Prem: CPN > current yield > YTM

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2
Q

YTM in a bond assumes…

A

Bond held to maturity
All payments made
Coupon payments reinvested at YTM

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3
Q

Semi-annual pay bond inputs

A 
N = yrs * 2
PMT = coupon/2
i = discount rate/2
FV = par value
PV = -amount paid
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4
Q

Zero coupon bonds

A

Always solved as semi annual pay bonds with PMT = 0

Most price sensitive

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5
Q

Premium bond

A

Coupon rate > YTM

PV > par

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6
Q

Discount bond

A

Coupon < YTM

PV < par value

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7
Q

Convexity

A

Price increase from decrease in yield is larger than price decrease from increase in yield

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8
Q

Maturity effect

A

Other things equal, value of bonds with longer maturities is more sensitive to a change in YTM

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9
Q

Coupon effect

A

Other things equal, value of bonds with lower coupon is more sensitive to change in YTM

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10
Q

Calculate the price of a bond one year after issuance if the yield does not change

A

N = # yrs - 1

For semi-annual pay bond:

N = (#yrs - 1) • 2

All other inputs stay the same

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11
Q

Valuing a bond using spot rates

A

Given spot rates S1, S2, S3…

Value of bond
= PMT/ (1+S1)
+ PMT/ (1 + S2)^2
+ (Par + PMT) /(1 + S3)^3

Discount each CF to represent value

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12
Q

Matrix pricing

A

Use YTM of traded bonds of same credit quality to estimate bond YTM

  • average of YTMs for same maturity
  • linear interpolation to adjust for diff in maturities
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13
Q

Effective yield on a semi - annual pay bond

A

= [(1 + YTM/2)^2] - 1

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14
Q

Yield -to-first call

A

Calculate YTM using number if semiannual periods until the first call date and the call price for FV

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15
Q

Option adjusted yield

A

OAY < YTM for a callable bond because callable bonds have higher yields to compensate bondhders for call option

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16
Q

Forward rates:

1y1y=

A

1 year rate, 1 year from now

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17
Q

Implied forward rates

A

(1+ S3)^3 =

(1 + S1) • (1 + 1y1y) • (1 + 2y1y)

(1 + S1) • (1 + 1y2y)^2

(1 + S2)^2 • (1+ 2y1y)

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18
Q

Calculate 2y1y from S2 and S3

A

2y1y =

(1 + S3)^3 / (1+ S2)^2

19
Q

FRN quoted margin

A

Number of bps added to reference rate

20
Q

FRN required Margin or discount margin

A

Number of bps required to return price to par at reset date

21
Q

FRN at discount

A

Quoted margin < required margin

22
Q

FRN priced at premium

A

Quoted margin > required margin

23
Q

Semi-annual bond basis YTM

A

= 2 • semi annual yield

= 2 • {[(1 + annual YTM)^1/2] - 1}

24
Q

Equivalent annual-pay YTM for semi annual pay bond

A

= [(1 + annual YTM/2)^2] - 1

25
Q

If YTM for bond increases after purchase and before first CPN, realized return will be:

A

Higher than YTM at purchase for buy and hold (long)

Lower than YTM at purchase for short period

26
Q

If YTM for bond decreases after purchase but before CPN, rate of return be

A

Lower than YTM at purchase if held for long period

27
Q

Macaulay duration

A

< # yrs to maturity

= WTD ave time until bondhders relieves cash flows

28
Q

Modified duration

A

=Mac dur / ( 1 + YTM)

29
Q

Approximate modified duration

A

= (V- - V+) / (2•Vo•chYTM)

30
Q

Approximate change in price

A

= -ModDur • change in YTM

31
Q

Effective duration

A

Approx change in price given 1% parallel shift in yield curve

For bonds with embedded options

32
Q

Price value of a basis point

A

Change in price for a 1 bps change in yield

= abs val(initial price - price after 1 bp change in yield)

= [(V- - V+)/2] * par value * 0.01

33
Q

Approximate convexity

A

= (V- + V+ - 2Vo) / (Vo • chYTM^2)

34
Q

% change in full bond price including convexity

A

= - annual mod dur (ch YTM)

+ 1/2 • annual convexity • (ch YTM)^2

35
Q

Option free bond

A

Interest rate risk = price volatility

Positive convexity

36
Q

Callable bond

A

Negative convexity at low yields
Positive convexity at higher yields

Price compression, as yields fall prices rise at decreasing rate bc there is max price on bond

37
Q

Putable bond

A

Positive convexity at all yields

Price compression, as yields rise prices at decreasing rate

38
Q

Debenture

Unsecured and subordinated loans

A

Bond with no collateral

39
Q

Four Cs of credit analysis

A

Capacity
Covenants
Collateral
Character

40
Q

Repo rates with longer dates

A

Are higher than with shorter dates

41
Q

Repo rates with high quality collateral or delivery

A

Are shorter than counterpart

42
Q

option-adjusted spread

A

= z-spread - option value

43
Q

money duration

A

= annual modified duration * full price of bond position

44
Q

duration gap

A

= macauley duration - investment horizon

CFA Level 1: Asset Valuation (4 decks)

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