Fixed Income: Understanding Risk & Return

Question 1

Carrying Value

Answer 1

The net amount shown for an asset or liability on the balance sheet; book value may also refer to the company’s excess of total assets over total liabilities. For a bond, the purchase price plus (or minus) the amortized amount of the discount (or premium)

Question 2

Cash flow yield

Answer 2

The internal rate of return on a series of cash flows

Question 3

Convexity adjustment

Answer 3

For a bond, one half of the annual or approximated convexity statistic multiplied by the change in the yield to maturity squared

Question 4

Curve duration

Answer 4

The sensitivity of the bond price (or the market value of a financial asset or liability) with respect to a benchmark yield curve

Question 5

Duration Gap

Answer 5

A bonds Macaulay duration minus the investment horizon.

Question 6

Effective convexity

Answer 6

A curve convexity statistic that measures the secondary effect of a change in a benchmark yield curve on a bonds price

Question 7

Effective Duration

Answer 7

The sensitivity of a bonds price to a change in a benchmark yield curve

Question 8

Horizon yield

Answer 8

The internal rate of return between the total return (the sum of reinvested coupon payments and the sale price or redemption amount) and the purchase price of the bond.

Question 9

Key rate duration

Answer 9

A method of measuring the interest rate sensitivities of a fixed income instrument or portfolio to shift in key points along the yield curve

Question 10

Macaulay Duration

Answer 10

The approximate amount of time a bond would have to be held for the market discount rate at purchase to be realized if there is a single change in interest rate. It indicates the point in time when the coupon reinvestment and price effects of a change in yield-to-maturity offset each other.

Question 11

Modified Duration

Answer 11

A measure of the percentage price change of a bond given a change in its yield to maturity

Question 12

Money convexity

Answer 12

For a bond, the annual or approximate convexity multiplied by the full price.

Question 13

Money duration

Answer 13

A measure of the price change in units of the currency in which the bond is denominated given a change in it yield to maturity

Question 14

Parallel shift

Answer 14

A parallel yield curve shift implies that all rates change by the same amount in the same direction

Question 15

Partial Duration

Answer 15

A method of measuring the interest rate sensitivities of a fixed income instrument or portfolio to shift in key points along the yield curve

Question 16

Perpetuity

Answer 16

A perpetuity annuity, or a set of never ending level sequential cash flows, with the first cash flow occurring one period from now. A bond that does not mature

Question 17

Price value of a basis point

Answer 17

A version of money duration, it is an estimate of the change in the full price rate of a bond given a 1 basis point change in the yield-to-maturity.

Question 18

Term Structure of yield volatility

Answer 18

The relationship between the volatility of bonds yield to maturity and times to maturity

Question 19

Yield duration

Answer 19

The sensitivity of the bond price with respect to the bonds own yield to maturity