Week 6 - Other Asset Classes Flashcards
1
Q
Types of US Government Bonds
A
- Treasury Bills
- Treasury Notes
- Treasury bonds
- STRIPS
- TIPS
2
Q
Types of UK Government Bonds
A
- Conventional Gilt
- Index-linked Gilts
3
Q
US 10Y treasury bond Yield Observations
A
- low frequency dynamics in bond yields connected to high inflation in the eighties
- Business cycle variation in yields around the trend
- Low rate environment not surprising given long-term pattern in declining yields
4
Q
Bond Yields at different maturities Observations
A
- Average returns increase with maturity
- Volatilities increase with maturity
- Sharpe ratio decline rapidly with maturity
- Sharpe ratios of short term bonds are very high, compared to equity markets
5
Q
Liquidity in Treasury Markets
A
- Treasury markets among the most liquid markets
- Big price differences between similar bonds (close substitutes)
- Points to downward-sloping demand curves
6
Q
What is a Convergence trade
A
- Yield spread between the new bond (Feb 31) and previous new bond (May 30) is 12bp -> new bond seems to be trading at a higher price (‘Liquidity Premium’)
- Convergence trade - Buy old bond short old bond -> Typically makes money
- In some cases, like fall of 1998, spread widens, leading to losses
7
Q
Corporate bonds
A
Different across:
- Maturity
- Credit rating
- Covenants
- Currency denomination
- Callability
- Traded Over-the-counter
8
Q
Credit Risk Premium
A
- Credit Spread is the difference between corporate bond yields and treasuries of the same maturities
- Comprised of expected default & Risk premium - Compensation for default and liquidity risk
9
Q
Corporate bond returns at different maturities
A
- Decreasing in credit rating
- Long term bonds yield more that short dated bonds
10
Q
How to measure volatility
A
- Parametric models (eg. GARCH)
- Realised variance using high-frequency data
- Implied volatility (VIX)
- Text-based variance measures
11
Q
Types of commodities
A
Energy - oil, gasoline
Metal - gold, silver, copper
Agricultural - corn, wheat…
12
Q
Commodities index returns
A
Average return is about the same as the S&P500
13
Q
Commodities correlation with bonds and stocks
A
- very low correlation
