Fixed Income

LEARNING OUTCOMES The candidate should be able to: explain what is meant by arbitrage-free valuation of a fixed-income instrument; calculate the arbitrage-free value of an option-free, fixed-rate coupon bond; describe a binomial interest rate tree framework; describe the backward induction valuation methodology and calculate the value of a fixed-income instrument given its cash flow at each node; describe the process of calibrating a binomial interest rate tree to match a specific term stru

LEARNING OUTCOMES The candidate should be able to: describe fixed-income securities with embedded options; explain the relationships between the values of a callable or putable bond, the underlying option-free (straight) bond, and the embedded option; describe how the arbitrage-free framework can be used to value a bond with embedded options; explain how interest rate volatility affects the value of a callable or putable bond; explain how changes in the level and shape of the yield curve af

LEARNING OUTCOMES The candidate should be able to: explain expected exposure, the loss given default, the probability of default, and the credit valuation adjustment; explain credit scores and credit ratings; calculate the expected return on a bond given transition in its credit rating; explain structural and reduced-form models of corporate credit risk, including assumptions, strengths, and weaknesses; calculate the value of a bond and its credit spread, given assumptions about the credit