Fixed Income Investments (12%)

Question 1

EAR to BEY

Answer 1

[(1 + EAR)^1/2 - 1]2

Question 2

Z-Spread

Answer 2

Option Cost + Option Adjusted Spread

Question 3

Effective Duration

Dur

Answer 3

P_- - P₊

——————

2 * BPS► * P

Percent change in value based on a 100 basis point change in interest rates.

Question 4

Price Value of a Basis Point

PVBP

Answer 4

Dur * .0001 * P

Question 5

Yield Ratio

for Tax Exempt Bonds

Answer 5

Yield on Tax-Exempt

————————————

Yield on US Treasury

Question 6

current yield is?

Answer 6

Annual cash flow/mkt price

ex: bond price at 95.75, coupon 5.10%

so 5.10/95.75 = 5.33%

Question 7

Forward rate calculation

Answer 7

tFm =[(1 + Z_m+t)^m+t / (1 + Z_m)^m] ^1/t - 1

           Spot Rate

1 year 10%

2 year 11%

3 year 12%

Two year forward 1 year from now?

₂F₁ = ((1+.12)^3/(1+.10)^1)^1/2-1

=13.01%.

Question 8

what is the pure expectation theory?

Answer 8

• yield for particular maturity is avg. (not simple avg) of short term rates expected in future.
• If short term rising, int. rates for longer will be higher than shorter.
• if short term falling, int. rates for longer will be lower.

Question 9

what is the liquidity preference theory?

Answer 9

in addition to expectations about future short term rates investors require risk premium for holding longer term stuff.

Question 10

Clean Price

Answer 10

Agreed upon price excluding accrued interest.

Question 11

4 Cs

Answer 11

• Capacity
• Collateral
• Covenants
• Character
  
  • assesment of issuer’s management, strategy, quality of earnings, and past treatment of bondholders.
  • history of fraud would fall under here.

Question 12

return impact of convexity and duration?

Answer 12

returnimpact~modified duration * ►spread+.5(convexity) *►spread²

Question 13

priority of types of debt

Answer 13

• First lien or first mortgage
• senior secured debt
• junior secured
• senior unsecured
• senior subordinated debt
• subordinated debt
• junior subordinated

Question 14

spot rate?

Answer 14

A spot rate is defined as the yield to maturity on a zero-coupon bond maturing at the date of that
cash flow.

Question 15

Duration Effect

Answer 15

Dur * BPS►

Question 16

Convexity Effect

Answer 16

Convexity * (BPS►)²