R18: Overview Of Fixed Income PM Flashcards
What are the roles of FI in portfolios?
Diversification
Regular CFs
Inflation-hedging
What are the two types of FI mandates?
Liability-based:
Immunisation (duration and cash flow matching)
Contingent immunisation
Horizon matching
Total return: Pure bond indexing Enhanced-matching primary risk factors Enhanced-minor risk factor mismatching Active management
What is the model for FI returns?
Income yield Roll down return Investor perception on yields/spreads Expected credit losses Expected currency gain/losses
Why use future contracts for leverage? What’s the formula?
Exposure to underlying without transacting, only margin deposit needed.
Leverage: (notional value - margin)/ margin
Where the notional is the current value of the underlying x quantity
Why use i/r swaps for leverage?
Like L/S bond portfolio. Only capital required is the collateral.
Why use inverse floating rate notes for leverage? What’s the formula?
Relationship between bond prices and i/r magnified.
Coupon = 15% - (1.5 × LIBOR) 》Can’t be 0
What’s a repo? What’s a repo rate? Haircut? Dollar interest formula?
Collateralised loan in which the seller of a security agrees to buy back at a specified dare at a specified price.
Repo rate= i/r charged on a repo loan (general - cash, security driven)
A haircut is credit protection.
Dollar interest = amount borrowed × repo rate × term of loan (days)/360
What affects the repo rate?
Quality of collateral Term of repo Availability of collateral Prevailing i/r Seasonal factors
What’s securities lending like? What’s the rebate rate?
Like repo but open-ended.
Rebate rate = collateral earnings rate - security lending rate. Repaid to borrower by lender, negative if securities hard to borrow.
What are the risks of leverage?
Compound losses when portfolio falls.
Potential for forced liquidation if portfolio falls.
Counterparts may withdraw financing in crisis, forcing to reduce leverage exposure.
What are zero-coupon bonds taxed as?
As income over bond’s life.
What are the two capital gains tax systems in the US and UK? What happens with and SMA?
US: pass through treatment
UK: tax deferral
SMAs pay tax on realised gains at the time when they occur.
