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

Fixed Income Flashcards by Samantha Joñes

Current Yield

= annual cash coupon payment / bond price

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

How well did you know this?

Not at all

Perfectly

YTM in a bond assumes…

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

How well did you know this?

Not at all

Perfectly

Semi-annual pay bond inputs

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

How well did you know this?

Not at all

Perfectly

Zero coupon bonds

Always solved as semi annual pay bonds with PMT = 0

Most price sensitive

How well did you know this?

Not at all

Perfectly

Premium bond

Coupon rate > YTM

PV > par

How well did you know this?

Not at all

Perfectly

Discount bond

Coupon < YTM

PV < par value

How well did you know this?

Not at all

Perfectly

Convexity

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

How well did you know this?

Not at all

Perfectly

Maturity effect

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

How well did you know this?

Not at all

Perfectly

Coupon effect

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

How well did you know this?

Not at all

Perfectly

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

N = # yrs - 1

For semi-annual pay bond:

N = (#yrs - 1) • 2

All other inputs stay the same

How well did you know this?

Not at all

Perfectly

Valuing a bond using spot rates

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

How well did you know this?

Not at all

Perfectly

Matrix pricing

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

How well did you know this?

Not at all

Perfectly

Effective yield on a semi - annual pay bond

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

How well did you know this?

Not at all

Perfectly

Yield -to-first call

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

How well did you know this?

Not at all

Perfectly

Option adjusted yield

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

How well did you know this?

Not at all

Perfectly

Forward rates:

1y1y=

1 year rate, 1 year from now

How well did you know this?

Not at all

Perfectly

Implied forward rates

(1+ S3)^3 =

(1 + S1) • (1 + 1y1y) • (1 + 2y1y)

(1 + S1) • (1 + 1y2y)^2

(1 + S2)^2 • (1+ 2y1y)

How well did you know this?

Not at all

Perfectly

Calculate 2y1y from S2 and S3

2y1y =

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

FRN quoted margin

Number of bps added to reference rate

FRN required Margin or discount margin

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

FRN at discount

Quoted margin < required margin

FRN priced at premium

Quoted margin > required margin

Semi-annual bond basis YTM

= 2 • semi annual yield

= 2 • {[(1 + annual YTM)^1/2] - 1}

Equivalent annual-pay YTM for semi annual pay bond

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

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

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

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

Lower than YTM at purchase if held for long period

Macaulay duration

< # yrs to maturity = WTD ave time until bondhders relieves cash flows

Modified duration

=Mac dur / ( 1 + YTM)

Approximate modified duration

= (V- - V+) / (2•Vo•chYTM)

Approximate change in price

= -ModDur • change in YTM

Effective duration

Approx change in price given 1% parallel shift in yield curve For bonds with embedded options

Price value of a basis point

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

Approximate convexity

= (V- + V+ - 2Vo) / (Vo • chYTM^2)

% change in full bond price including convexity

= - annual mod dur (ch YTM) | + 1/2 • annual convexity • (ch YTM)^2

Option free bond

Interest rate risk = price volatility Positive convexity

Callable bond

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

Putable bond

Positive convexity at all yields Price compression, as yields rise prices at decreasing rate

Debenture Unsecured and subordinated loans

Bond with no collateral

Four Cs of credit analysis

Capacity Covenants Collateral Character

Repo rates with longer dates

Are higher than with shorter dates

Repo rates with high quality collateral or delivery

Are shorter than counterpart

option-adjusted spread

= z-spread - option value

money duration

= annual modified duration * full price of bond position

duration gap

= macauley duration - investment horizon