IP - Chapter 8 - Fixed Income Securities Analysis* Flashcards
These bonds are typically called at a premium to par.
Callable Bonds
Bonds that sell at a significant discount from par and does not pay periodic coupon payments.
Zero Coupon Bonds
What is the best way to calculate YTM?
Use a financial calculator
Explain Bond See-Saw Vertically and Horizontally?
Vertically (Top to Bottom) : Premium, Par, Discount
Horizontally: (Left to Right) : Coupon, CY, YTM
The yield used in the valuation of a fixed income security is stated in the form of an ___________ .
Annual Rate of Return
This type of risk is directly related to the bid-ask spread. The larger the spread, the greater the risk.
Liquidity
Represent current market interest rates for various maturities.
Yield Curves
What are the 3 most common yield curves?
Upward, Downward, and Flat
Most actively traded bond market, extremely liquid
Treasury Market
Theory based on the concept that longer term rates (or forward rates) are based on expected future short term rates.
Pure Expectations Theory
Under this theory, investors require premiums for the increased exposure to interest rate risk inherent in long term bonds.
Liquidity Preference Theory
In this theory interest rates are determined by supply and demand
market segmentation theory
The interest in these type of bonds are state tax exempt but subject to federal taxes.
Treasury Bonds
States that financial institutions have certain term preferences as to the maturity of their assets for matching liabilities.
Preferred Habitat Theory
The price of a bond is attributable to 3 factors:
1) YTM
2) Coupon
3) Term of the bond
A weighted measure of payback
Duration
Used to determine the percentage change in the price of a bond or bond portfolio for a specific change in prevailing interest rates.
Modified Duration
A linear measure of the curvilinear bond price yield relationship also assumes parallel shifts in the yield curve
Duration
A bond or bond portfolio can be initially immunized if the Macaulay duration of the bond or bond portfolio matches when ?
The investor needs the funds
The degree to which the bond price-yield relationship is _______________ .
Curvilinear
What are the three important uses for duration?
1) Measuring Volatility
2) Estimating price changes based on Interest Rates
3) Immunizing a bond/bond portfolio against interest rate risk
Duration is not a static number and will change as ___________ and _____________ change.
Time, Interest Rates
3 main factors that impact a bonds duration are:
Coupon Rate, Maturity, YTM
What kind of relationship do coupon rate and duration have?
Inverse
Generally duration is ____________ term to maturity unless it is a zero coupon bond.
Less than
What happens to duration when maturity increases?
Duration increases at a decreasing rate
How is YTM related to duration?
Inversely
Concept of minimizing the impact of changes of interest rates on the value of investments.
Immunization
A measure of the curvature of the price of a bond based on the changes in interest rates.
Convexity
What is the relationship between Coupon, YTM, and Maturity with Duration and Convexity?
Coupon - Inverse with Duration, Inverse with Convexity
YTM - Inverse with Duration, Inverse with Convexity
Maturity - Direct with Duration, Direct with Convexity
Exchanging bonds in a strategy with identical characteristics as an arbitrage opportunity
Substitution Swap
Exchanging similar bonds from two different market sectors in a strategy (ie. Treasuries for Corporates)
Intermarket Spread Swap
This rule does not count with fixed income securities if purchased from a different issuer.
Wash Sale Rule
What are the 3 yield curve strategies?
Ladder, Barbell, Bullet
Used to take advantage of expected changes in interest rates
Rate Anticipation Swap
Strategy designed to take advantage of normal yield curve structure. This is a ‘buy and hold’ strategy that works when LT rates are higher than ST rates. In this strategy the investor purchases long term bonds and holds them for a period of time but less than maturity.
Riding the Yield Curve
Weighted measure of payback used to estimate volatility of a bond or bond portfolio?
Duration
