Fixed Income Flashcards
1
Q
When will YTM and Actual Return be identical?
A
The only way that yield to maturity and actual return will be identical or even similar is during a stable interest rate environment
2
Q
When Expected or Future Spot rate > Current Forward or Implied Rate
A
Bond under value, discount at too high rate.
and the forward contract will increase because a lower discount rate is being used than originally predicted, therefore Long Forward
3
Q
What does lognormal assumption mean in the binormal tree?
A
The lognormal assumption means that interest rates on every path will be positive. In addition, when interest rates are higher, the lognormal assumption builds in higher volatility.
