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28 Cards in this Set
- Front
- Back
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Factors effect treasury return?
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changes in level of yield, changes in slope, changes in curvature
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What is the Use of duration?
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quantify exposure to a parallel shift in yield curve
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In addition to duration what else needed to supplement duration measure?
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key rate duration
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Limitation of using just on-the-run issues to construct theoretical spot rate curve ?
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Large gap, issue is special for repo, loss information about the yield on other Treasury securities
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If all T-bills and Treasury coupon securities are used to construct the theoretical spot rate curve, bootstrapping method can be used or not ?
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No, because there might be more than 1 issue for a give maturity
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Problems with using Treasury strips to construct theoretical spot rate curve?
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tax, liquidity, maturity sectors that non-US investors might want to trade off yield for tax advantages
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what is the meaning of 1 year forward rate 7 years from now, 6.4% ?
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6.4% is the rate investor can lock in today by buying 8 years zero coupon bond or buying 7 years zero coupon bond and when it matures reinvest in another zero coupon that has 1 year to maturity
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What is implied volatility?
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Volatility observed from prices of options and caps (issues with this method: assume the option pricing model is correct and difficult for interpreting
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Spread Measure:
Nominal, Zero-volatility, Option-adjusted reflect compensation for what kind of risk? |
Nominal (sector yield curve): credit, option, liquidity
Zero (spot rate yield curve): same as nominal OAS (spot rate yield curve): credit, liquidity |
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Relationship b/w z-spread and OAS?
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OAS = z-spread - option cost
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value of callable bond = ? value of putable bond = ?
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value of callable bond = option free - call option (volatility increase , call option value increase , value of callable bond decrease)
value of putable bond = option free + put option (volatility increase, value of put option increase, value of putable bond increase) |
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different duration quoted by dealers caused by what?
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volatility assumption, different benchmark interest rate, different call rules
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when computed effective duration and convexity of embedded option, what is the assumption on OAS ?
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OAS is assumed to be constant
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When using backward induction method to valuate floaters, why it is neccessary to make adjust?
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Because payment is made at the beginning of next period, so we need to discount that cashflow
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Conversion ratio=?
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Par/share price
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Conversion value=?
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Market price of stock x conversion ratio
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Market conversion price
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Market price of bond/conversion ratio
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Conversion premium per share
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Market conversion price - market share price
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Conversion premium ratio
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Premium per share/ market share price
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Premium over straight value
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Market priceof bond / straight value of bond
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Favorable income differential per share
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(Coupon payment - conversion ratio * div per share)/ conversion ratio
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Premium payback period
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Conversion premium per share/favorable income differential per share
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Premium over straight value as a measure of downside risk for convertable bond has what limitation?
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It assumes straight value does not change
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What are 2 factor model used to valuate convertible bond
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Price movement of underlying stocks and interest rate movement
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Afirmative covenant?
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Covenant that requires bond issuers to do something rather than restrict them doing something
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SMM@t =
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SMM@t = (prepayment@t)/(begining mortgage balance@t - schedule prin. payment@t)
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CPR =?
Smm =? |
CPR = 1-(1-SMM)^12
SMM =1-(1-CPR)^1/12 |
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100 PSA expressed in CPR
If PSA is 165 íntead of 100, calculate SMM? |
IF t<30 then CPR = 6%*(t/30)
If t >30 then CPR = 6% If PSA 165 then CPR = 6%(t/30)*1.65 or 6%*1.65 |
