Intro to fixed income valuation

Question 1

For bonds maturing in more than one year:

Answer 1

An annualized and compounded yield-to-maturity is used.

Question 2

Discount Margin

Answer 2

• The required margin (i.e., discount margin) is the yield spread over, or under, the reference rate such that a FRN is priced at par value on a rate rest date.

Question 3

There are several important differences in yield measures between the money market and the bond market:

Answer 3

Bond yield to maturity is annualized and compounded.
• The rate of return on a money market instrument is stated on a simple
interest basis.
• Money market instruments often are quoted using nonstandard
interest rates and require different pricing equations than those used
for bonds.
• Money market instruments having different times-to-maturity have
different periodicities for the annual rate.
• Quoted money market rates are either discount rates or add-on
rates.

Question 4

The difference between yields on two bonds might be

due to various reasons, such as:

Answer 4

• currency denomination • credit risk
• liquidity • tax status
• periodicity • varying time-to maturity

Question 5

Spot curve

Answer 5

The (government bond) spot
curve is a sequence of yields-tomaturity on zero-coupon
(government) bonds.

Question 6

Yield Curve

Answer 6

The yield curve on coupon
bonds is a sequence of yields-tomaturity on coupon paying
(government) bonds.

Question 7

Implied forward rate

Answer 7

• is calculated from spot rates and is a
break-even reinvestment rate
• links the return on an investment in a
shorter-term zero-coupon bond to the
return on an investment in a longerterm zero-coupon bond.

Question 8

G- Spread

Answer 8

The yield spread in basis points over an actual or G interpolated yield of government bond

Question 9

I-spread or interpolated spread to the swap curve

Answer 9

The yield spread of a specific bond over the
standard swap rate in that currency of the
same tenor

Question 10

A zero volatility spread (Zspread) of a bond

Answer 10

Calculated as a constant yield spread over a government (or interest rate swap) spot curve — as opposed to the G-spread and Ispread, which use the same discount rate for each cash flow.