Fixed Income MM

Fixed Income
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© EduPristine CFA L – I\ Fixed Income
Debt Investment
Bonds & Advanced Features Fundamentals of

Basics of Bond Bond Pricing Yield Calculation
Risk Management of Bonds Credit Risk
© EduPristine CFA L – I\ Fixed Income 2

Debt Investment

Basic Features of Indenture: Agreement containing the terms

Bond Structures under which money is borrowed.
Term to Maturity: Length of time until loan

contract or agreement expires.
Repayment / Par Value: Amount borrower promises to

Pre-payment Provisions pay on or before maturity date of the issue.
Coupon Rate: When multiplied by par value,

gives amt of interest to be paid each period.
Basics of Floating Zero-Coupon Bonds: No interest; bonds are

Rate Bonds sold at a deep discount to their par values.
To derive a bond's value using spot rates, Q. Given the following spot rates calculate the
discount the individual cash flows by value of 3 year, 6% treasury bond?
benchmark rate for each flow's time horizon. 1 year – 5% 2 year – 5.5% 3 year– 6%
Sum of PV of the cash flow is bond's current
6 6 106
value. This value is the arbitrage free value. Ans. = + +
(1 + 5%) (1 + 5.5%) (1 + 6%)3
2
= 100.1046

Debt Investment

Basic Features of Bullet Bonds: Lump sum at maturity, pays entire

Bond Structures principal.
Serial Bonds: Pay- off principal through series of

payments over time.
Repayment / Amortizing Securities: Periodic principal & interest

Pre-payment Provisions payments.
Sinking Fund: Provisions for bond retirement through

pre-defined principal payments over life of the issue.
Call Provisions: Issuer has right (but not obligation) to

Basics of Floating
retire all or part of issue prior to maturity. Issuer
Rate Bonds
owns option to call the bonds away from investor.
Non-refundable Bonds: Prohibit premature

retirement of an issue from proceeds of a lower
coupon bond. Bonds that carry these provisions can
be freely callable but nonrefundable.

Debt Investment

Basic Features of
Bond Structures
Repayment /
Pre-payment Provisions
These securities pay variable rate of interest.

Basics of Floating Common procedure for setting coupon rates on
Rate Bonds floating rate bonds starts with reference rate; then
adds/ subtracts a stated spread.
Coupon Formula:
New Coupon Rate = Reference Rate +/- Quoted
Margin

Debt Investment

Interest Rate Risk Reinvestment Risk Credit Risk Sovereign Risk Event Risk
Inverse Relationship b/w Longer maturity bonds. Higher interest rate risk Call option value
Price
Interest Rates & Bond Prices (all else same).
Smaller coupon bonds. Higher interest rate risk
(all else same). Call Price
If market interest rates are high, price volatility Callable Putable bond
bond Put option
will be lower than if market interest rates are low.
value
If call/put option is embedded, then interest rate
Yield
risk will be lower. Option free bond
Floating Rate Securities have If coupon rate > required market yield 0.6
very low level of price volatility bond price > par value: premium bond 0.5
0.4
If coupon rate < required market yield 0.3
bond price < par value: discount bond 0.2
0.1
If coupon rate = required market yield 0
bond price = par value: par bond 1 yr 2 yrs 5 yrs 7 yrs 10 yrs 12 yrs 15 yrs 20 yrs 25 yrs 30 yrs

Debt Investment

If interest rates decline, investors are forced to Credit spread risk: Credit spread is difference in
reinvest at lower yields. bond's yield and yield on risk-free security. All else
Bonds with high coupons have greater risk. equal, riskier the bond, higher the spread.
Greatest risk is with callable bonds, where all or Downgrade risk: Bond may be reclassified as
part of principal can be repaid in low interest rate riskier security by a major rating agency.
environment. Default risk: Issuer might not make payments.
Zero Coupon Bonds eliminate reinvestment risk.
Q. How much reinvestment income needs to be

generated to get a CAGR of 7% from 6%, 10 year
treasury bond?
Ans: =100*(1.035)20 = 198.98

Required reinvestment income =
198.98 – 100 – (3*20) = 38.98

Debt Investment

Risks in investing in a foreign bond: The ability of an issuer to make interest and
Adverse Price Change principal payment changes drastically and
• Credit Spread Risk unexpectedly because of one of the following
Liquidity Risk – ability to be factors:
sold quickly • Downgrade Risk
A natural disaster
Volatility Risk – changes Default
An industrial accident
in value of securities with • Unwillingness of foreign government to pay
embedded options A takeover
• Inability to pay due to unfavorable economic
Inflation Risk – conditions Corporate restructuring
uncertainty about the A regulatory change
prices of goods and
services
Exchange Rate Risk –
uncertainty about the
value of foreign currency
cashflows
Yield Curve Risk –
changes in shape of the
yield curve
Prepayment Risk –
repayments in excess of
required

Debt Investment

Accrued Interest &

Basic Bond Pricing
Clean Prices
Discount at constant rate applied to all cash Treat each cash flow as a single zero-coupon Full price/Dirty Price includes accrued interest.
flows (YTM) to find all future cash flows' PV bond & find PV of each bond using appropriate Bond price without accrued interest is clean
spot rates for each cash flow. Prices must be price.
the same to prevent arbitrage. Full price = Clean price + Accrued interest
Q: If you want to purchase a $1,000 bond with

Callable Bond Value = Value of Option free a 5% coupon, paid semiannually. Today is July
CF1 CF2 CF3
Market price = + + + .. bond – value of embedded call option 15th. The last coupon was paid June 30th. If the
(1 + YTM )1 (1 + YTM )2 (1 + YTM )3
quoted price is $902, how much is the cash or
full price ?
CF1 CF2 CF3 Ans:
Market price = + + + ... Cash Price = Quoted Price + Accrued Interest
(1 + S) (1 + S) (1 + S)3
2
= 902 + (1,000)(0.05)(15/365)
= 902 + 2.05 = $904.05
Q: What is the market price of a ten year, Using Calculator:

$1,000 bond with a 5% coupon paid annually, Y=6%, T=10, PMT=50, FV=1000
if the bond's yield-to-maturity is 6%? CMP PV -> -926.40
Ans:
= 50/1.061 + 50/1.062 +……….+1050/1.0610
= 926.40

Debt Investment

Converting a bond equivalent yield (BEY) to an Nominal Spread: Current yield =

equivalent annual yield (EAY) or vice versa: Annual coupon payment / Bond price
Nominal Spread = YTM Bond − YTM Treasury
BEY of an annual pay bond
[ ]
Z-Spread: Solve for ZS where price =
= 2 * (1 + YTM AnnualPay ) − 1
1/2 Q:
 Coupon   Coupon  If a bond has a 5.5% annual pay coupon
=  1 
+ 
 (1 + 1yr Spot rate + ZS )   (1 + 2 yr Spot rate + ZS )2  and the current market price of the
Annual equivalent Yield= (1+(BEY/2))2 -1
bond is $1,050, the current yield is?
OAS: Option Adjusted Spread
Ans:
= Z-Spread – Option Cost
= 55/1050 = 5.24%
Forward Rates given Spot Rates: YTM is a IRR based on bond price & its
Yield Volatility
(1 + S2)2 = (1 + 1f0) (1+1f1) future cash flow
Price
PL '
For Callable Bonds, Z-Spread > OAS and Option Cost > 0 CF1 CF2
PL Bond Price = + + ..
PL " For Putable Bonds, Z-Spread < OAS and Option Cost < 0 (1 + YTM)1 (1 + YTM) 2
PH' PH PH"
Forward rate is a lending rate for a future

loan (1+S2)2 = (1+S1)*(1+1f1)
Yield
YL ' YL YL " YH' YH YH"
Q:
Calculate the 1yr fwd rate two years from
When the yield level is high, a change in now, if S1 = 4% S2 = 5% & S3 = 6%
interest rates does not produce a large change Ans:
in price. (1+S3)3 = (1+S2)2*(1+1f2) 1f2 = 8.03%
However, when yields are low, changes in
interest rates produces a large change in price.

Debt Investment

Duration & Convexity Other Duration Measures Term Structure Theories
Pure Expectations Hypothesis: Yield curve Liquidity Preference Theory: Investors prefer Market Segmentation Theory: Market for debt
shape reflects investor expectations about greater liquidity and will demand premium for securities is segmented on basis of investor's
future behavior of short-term interest rates. illiquidity(higher yields to invest in longer-term maturity preference. Each segment's interest
Fwd rates computed using today's spot rates issues). rate level is determined by supply/demand
are best guess of future interest rates.
Expectations about short term rates and

corresponding shape of the yield curve
• Rise in the future – upward sloping
• Fall in the future – Downward Sloping
• To rise then fall – Humped
• To remain constant – Flat

Debt Investment

Duration is the slope of a bond's price-yield Convexity is a measure of degree of curvature A callable bond is likely to be called as yields
function. It is steeper at low interest rates, or convexity in the price/yield relationship. fall, so no one will pay a price higher than the
flatter at high interest rates. So, duration Convexity accounts for amt of error in call price. The price won't rise significantly as
(interest rate sensitivity) is high at low rates estimated price (based on duration). yield falls & you'll see negative convexity at
and low at higher rates, this holds for non work as yields fall, prices rise at a decreasing
callable bonds. rate. For a positively convex bond, as yields fall,
prices rise at an increasing rate.
Effective duration (D) = (V--V+)/(2V0(Δy))

Convexity measures curvature of the price yield
function
Modified duration assumes that bond is a non % ∆P = [ − Duration * ∆y + Convexity * (∆y ) 2 ] *100
callable bond, due to which cash flows of the
bond will not change in calculation of duration
Note: Δy is in decimal form
Macaulay Duration
Modified Duration =
(1 + YTM )
Q:
Calculate the new price of a bond currently trading at 105.5
having a duration of 7.5, if its yield rises to 6.5% from 6.2%?
Ans:
% change in price =-0.3%*7.5=-2.25%
= (1 - 2.25%)*105.5 = 103.1263

Debt Investment

DV01/PVBP Duration = - percentage change in bond price / Dollar Duration

It is the absolute value of the change in the yield change in percent The approximate dollar price change for a
price of a bond for a 1 basis point change in 100bps change in yield
yield
PVBP = Duration * 0.01% * Bond Value

Debt Investment

Factors Affecting the Spread Volatility of a First Lien Loan Key Credit Analysis Ratios:
Corporate Bond: Profitability and Cash Flow
Credit Cycle • EBITDA
Broader Economic Conditions Second/Subsequent Lien • FFO
Financial Market Performance • Free cash flow before dividends
Willingness of Broker-Dealers to provide Senior Secured Leverage
sufficient capital for market making • Debt/Capital
General Market Demand and Supply • Debt/EBITDA
Senior Subordinated • FFO/Debt
Coverage
• EBITDA/Interest
Senior Unsecured
• EBIT/Interest
Subordinated Debt
Expected Loss = Default Probability * Loss Issuer Credit Rating – Corporate Family Rating
Severity given Default (CFR)
Junior Subordinated
Loss Severity = 1 – Recovery Rate Issue Credit Rating – Corporate Credit Rating
(CCR)

Question 1
1. Which of the following is least likely to be a negative covenant of a bond’s indenture?
A. A provision prohibiting the company to pledge the same asset to back several debts
continuously
B. A provision requiring the company to maintain a current ratio of 2 or higher
C. A provision restricting the company to sell asset which have been pledged as collateral

Answer
• Solution: (b) Negative covenants are prohibitions on the borrower and positive
covenants are actions that the borrower promises to perform. Here, the requirement of
a current ratio of 2 or higher is a positive or affirmative covenant.

Question 2
2. Which of the following has the highest call protection?
A. Callable bonds
B. Bonds with prepayment options
C. Nonrefundable bonds

Answer
• Solution: (c) Nonrefundable bonds prohibit the call of an issue using the proceeds from a
lower coupon bond issue. A nonrefundable bond can be called for any reason except
refunding. Bonds with prepayment options give the buyer or issuer the right to
accelerate principal payment on a loan. Callable bonds are those which give the issuer
the right but not the obligation to retire all or part of the issue prior to maturity

Question 3
3. Which of the following is the least relevant risk for securities without embedded options?
A. Volatility Risk
B. Credit Risk
C. Liquidity Risk

Answer
• Solution: (a) Changes in interest rate change the values of the options embedded with
the securities. Thus, volatility risk is least relevant for securities which do not have
embedded options.

Question 4
4. Which of the following is positively related to the interest rate risk?
A. Maturity
B. Coupon Rate
C. Yield

Answer
• Solution: (a) If two bonds are identical except for maturity, the one with the longer
maturity will have a greater percentage change in value for a given value of yield as
compared to the other. Thus, it will have a greater interest rate risk.

Question 5
5. Which of the following is negatively related to the interest rate risk of a security?
A. Embedded Call Option
B. Maturity
C. Reset Period

Answer
• Solution: (a)An embedded call option reduces the interest rate risk as it limits the upside
price movement when interest rates decline. Thus, it is negatively related to the interest
rate risk. The higher the maturity, the more is the interest rate risk. Also, with higher
reset period in case of floating rate securities, the interest rate risk is more.

Question 6
6. The price of a bond changed from $30,000 to $33,000 in the last 40 days. The bond’s yield
fell from 6% to 5% during this period. Which of the following is closest to the duration of the
bond?
A. 5
B. 20
C. 10

Answer
• Solution: (c) The percentage change in price of the bond = (33-30)/30 = 10%. Bond
duration is calculated as:

Question 7
7. Which of the following is the least appropriate?
A. Duration of a bond depicts the sensitivity of the portfolio due to parallel shifts in the
yield curve
B. Duration of a bond is always a positive number
C. For non-parallel shifts in the yield curve, the dollar duration is an appropriate indicator
for measuring the sensitivity of the portfolio

Answer
• Solution: (c) For a non-parallel shift, dollar duration is a poor indicator of sensitivity of
the portfolio. So is duration. This is because in case of non-parallel shifts, the amounts by
which the yields change are different for bonds of different durations. Duration of a bond
is always a positive number.

Question 8
8. Which of the following is expected to have the highest (most favorable) credit rating?
A. A sovereign bond issued in home currency
B. A sovereign bond issued in foreign currency
C. A foreign bond (issued by some other country)

Answer
• Solution: (a) It is easier for a country to print money in order to meet the debt
obligations denominated in the home currency than to exchange the local currency for a
fixed amount of foreign exchange. Thus, local currency sovereign bond is often rated
higher than foreign currency denominated debt.

Question 9
9. A $100,000 face value Treasury bonds is quoted at 103-4. Which of the following is the
closest to the market value of the bond?
A. $99000
B. $ 103400
C. $ 103125

Answer
• Solution: (c) T-bond and note prices in the secondary market are quoted in percent and
32nd of 1% of face value. A quote of 13-4 hence translates into 103 + 4/32 = 103.125% of
par. Thus, the price is $103,125

Question 10
10. Which of the following is the least likely reason for mortgage securitization?
A. Increase the debt’s attractiveness for investors
B. Increase the interest rate on loans
C. Increase the availability of funds

Answer
• Solution: (b) Securitization combines many similar debt obligations for issuing securities.
The main reason for mortgage securitization is to increase the debt’s attractiveness to
investors and to decrease investor required rates of return. This will make the funds
more available for home mortgages.

Question 11
11. Which of the following is least likely a legal obligation?
A. Debt supported by public credit enhancement program
B. Appropriation-backed obligations
C. Double-barreled bonds

Answer
• Solution: (c) Appropriation-backed obligations are moral obligation bonds. In times of

shortfall, the state may appropriate funds for issuers from its general fund. This moral
pledge enhances the security of such bonds but is not legally binding. Debt supported by
public credit enhancement program is a legally enforceable contract and is normally
used to support the state’s school system. Double barreled bonds are backed by both the
issuing authority’s taxing power and by additional resources which fall outside the
general fund.

Question 12
12. For a 5-year Treasury STRIP selling at a price of $780, which of the following is closest to
the semiannual-pay Yield to Maturity?
A. 5.03%
B. 6.45%
C. 4.78%

Answer
• Solution: (a) The semiannual-pay YTM is calculated by using the financial calculator. The
values to be keyed in are: FV: 1000, PV: -780, N: 10, PMT: 0, CPT I/Y: 2.52%. This is the
semiannual rate. The annual rate is 5.03%.

Question 13
13. A 20-year 12% semiannual pay bond with a full price of $1200 can be called in 5 years at
$1100 and at par in 8 years. Which of the following is closest to the Yield to First Par Call?
A. 4.25%
B. 7.50%
C. 8.50%

Answer
• Solution: (c) FV: 1000, N: 16, PMT: 60, PV: -1200; CRT I/Y = 4.25%. Thus, annual yield =
8.50%.

Question 14
14. A 10-year 7% Treasury bond’s current market price is $840. The par value payable at
maturity is $1000. Which of the following is closest to the reinvestment income that must be
generated over the life of the bond to provide the investor with a yield equal to the YTM on
a semiannual basis?
A. 450
B. 430
C. 420

Answer
Solution: (b)We first calculate the yield to maturity of the bonds. It can be calculated using
the financial calculator.
PV: -$840, FV: 1000, PMT: 35, N: 20, CPT I/Y = 4.76. Thus, YTM = 9.52%.
Now, the total value of the bond after the maturity period of 10 years is
The total amount of coupon and principal payments is
Thus, the reinvestment income required is 2129.07 – 1700 = 429.07.

Question 15
15.The annualized spot rates for Treasury securities of different maturities are given in the
following table:
Maturity 0.5 year 1 year 1.5 years
Spot Rate 3% 4% 5%
Which of the following is the closest to the value of a 1.5 year, 7% Treasury security?
A. 103
B. 100
C. 98

Answer
• Solution: (a) We can use the financial calculator to compute the present value of each
coupon payment and the principal payment using the spot rates as the discounting rate.
Adding these will give us the current value of the security.
N=1, FV = 3.5, I/Y = 3/2 = 1.5, CPT PV = -3.45
N= 2, FV = 3.5, I/Y = 2, CPT PV = -3.36
N= 3, FV= 103.5, I/Y = 2.5, CPT PV = -96.11.

Question 16
16.Which of the following is most likely true?
A. Callable bonds exhibit negative convexity at high yields
B. For option free bonds, the increase in price due to decrease in yield is more than the
decrease in price due to an equal increase in yield
C. With decreasing yields, the price of a callable bond falls with increasing rate

Answer
• Solution: (b) Option free bonds exhibit positive convexity. Thus, the price of an option-
free bond increases more when yields fall than it decreases when yields increase. For
callable bonds, the price appreciation is limited to the call price. Thus, after a point, a
decrease in yield results in increase in prices, but with a decreasing rate. At high yields,
the value of call option is very low, hence they exhibit positive convexity at high yields.

Question 17
17.An investor has three bonds in his portfolio. The market prices of the bonds are $1500,
$2500 and $2000. The durations of these bonds are 5.6, 8.2 and 4.7 respectively. Which of
the following is the closest to the portfolio duration?
A. 5.85
B. 4.47
C. 6.39

Answer
• Solution: (c) The weights of the bonds in the portfolio are 1500/6000 = 0.25, 0.42 and
0.33 respectively. The duration of a portfolio is the weighted average of the durations of
individual bonds. Thus, portfolio duration is

Question 18
18.An 8% Treasury bond with a current price of $890 has a yield to maturity of 7%. The
convexity of the bond is 72 and the duration is 8.45. Which of the following is the closest to
the percentage increase in price of the bond with a 1% decrease in yield?
A. 7%
B. 8%
C. 9%

Answer
• Solution: (c) The duration effect on increase in price is The convexity effect is given as
Thus, the net effect on price is an increase of

Question 19
19. What would be the forward rate for a period of 2 years, 2 years from now for the AAA
corporate bond issued by Zebra Inc., if the spot rates of years 1,2,3,4 are 3%, 4%, 5%, 6%
respectively?
A. 8%
B. 4%
C. 7%

Answer
Answer: A
Given: S1 =3%, S2 = 4%, S3 = 5% and S4 = 6%
Now, forward rate for a period of 2 years, 2 years from now, 2f2 =
Putting the values, 2f2 = 8.04%

Question 20
20. Using the information given in the previous question, calculate the forward rate for a
period of 1 year, 1 year from now.
A. 4%
B. 5%
C. 6%

Answer
Answer: B
Given: S1 =3%, S2 = 4%, S3 = 5% and S4 = 6%
Now, forward rate for a period of 1 years, 1 years from now, 1f1 =
Putting the values, 1f1 = 5%

Question 21
21. Having calculated the effective duration in the previous question, Jerry now wishes to
calculate the bond price when the YTM increases to 7.5%. What would be the new bond
price given the change in the YTM of the bond.
A. $844.4
B. $878.2
C. $857.5

Answer
Answer: C
Using the relationship:
So, % change in BV = -9.44*0.5 % = -4.72%
New price of the bond = $900 (1-0.0472) = $857.5

Question 22
22. For which of the following option embedded bonds, OAS (option adjusted spread) is less
than the zero volatility spread:
A. Only for callable bonds
B. Only for putable bonds
C. For both callable and putable bonds

Answer
• Answer: A
• In case of a callable bond, the lenders require a higher yield than for a similar putable
bond. In that case, the zero volatility spread has to exceed OAS. The reverse is true for
putable bonds.

Question 23
23. What would be the YTM for bonds issued by James Corp. at $850, if the company
promises to pay $1000 at the end of 10 years from now? Moreover, the firm has promised to
pay 5% coupon on face value to its bondholders annually.
A. 6.72%
B. 5.95%
C. 7.15%

Answer
• Answer: C
• Use the BA II Plus calculator to calculate YTM:
• Plug in the following values, FV = 1000, PMT = 50, N= 10, PV= -850
• So, I/Y come out to be 7.15%.
• Hence, YTM = 7.15%

Question 24
24. Which of the following otherwise identical bonds would have the least interest rate risk?
A. 7% coupon, 5 years to maturity
B. 6% coupon, 10 years to maturity
C. 7% coupon, 10 years to maturity

Answer
• Answer: A
• Interest rate risk is directly related to years to maturity and inversely to coupon rate.

Question 25
25. James, a portfolio manager is considering including the bonds issued by Kathy
Corporation. The bond is currently trading at $1020 with 10 years to maturity. The firm has
promised to pay 6% coupon semi-annually. What would be the YTM for the bond?
A. 5.73%
B. 3.45%
C. 7.76%

Answer
• Answer: A
• Use the BA II Plus calculator to calculate YTM:
• Hence YTM = 2.86*2 = 5.73%.

Question 26
26. In the previous example, suppose the bond has an embedded option that gives the right
to the firm to call the bond after 4 years at $1005.
A. 6.78%
B. 4.87%
C. 5.54%

Answer
• Answer: C
• Use the BA II Plus calculator to calculate YTC:
• Hence YTM = 2.77*2 = 5.54%.

Question 27
27. In the previous question, calculate the current market price of the bond.
A. $788
B. $887
C. $1156

Answer
• Answer: A
• Use the BA II Plus calculator to calculate PV of the bond:
• Plug in the following values, FV = 1000, PMT = 50, N= 20, I/Y= 7
• So, PV comes out to be 788.
• Hence, market price of the bond is $788.

Question 28
28. What would be the yield of a bond that would pay $1000 at maturity and is currently
trading at $975? The bond would mature in 5 years and pays a coupon of 5% every 6
months.
A. 5.58%
B. 6.45%
C. 5.95%

Answer
• Answer: A
• Use the BA II Plus calculator to calculate YTM of the bond:
• Plug in the following values, FV = 1000, PMT = 25, N= 10, PV=-975
• So, YTM comes out to be 5.58%.

Question 29
29. What would be the price of a bond (currently trading at $900) after a decrease in yield
from 9.4% to 9.3%? The duration of the bond is 9.
A. $981
B. $908
C. $892

Answer
• Answer: B
• = -9 X -0.1% = 0.9%
• Bond value after decrease in yield = $900(1+0.9%) = $908.1

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Fixed Income

Bonds & Advanced Features Fundamentals of

© EduPristine CFA L – I\ Fixed Income 2

Bonds & Advanced Features Fundamentals of

Basic Features of Indenture: Agreement containing the terms

Term to Maturity: Length of time until loan

Repayment / Par Value: Amount borrower promises to

Coupon Rate: When multiplied by par value,

Basics of Floating Zero-Coupon Bonds: No interest; bonds are

© EduPristine CFA L – I\ Fixed Income 3

Bonds & Advanced Features Fundamentals of

Basic Features of Bullet Bonds: Lump sum at maturity, pays entire

Serial Bonds: Pay- off principal through series of

Repayment / Amortizing Securities: Periodic principal & interest

Sinking Fund: Provisions for bond retirement through

Call Provisions: Issuer has right (but not obligation) to

Non-refundable Bonds: Prohibit premature

© EduPristine CFA L – I\ Fixed Income 4

Bonds & Advanced Features Fundamentals of

These securities pay variable rate of interest.

© EduPristine CFA L – I\ Fixed Income 5

Bonds & Advanced Features Fundamentals of

© EduPristine CFA L – I\ Fixed Income 6

Bonds & Advanced Features Fundamentals of

Q. How much reinvestment income needs to be

Ans: =100*(1.035)20 = 198.98

© EduPristine CFA L – I\ Fixed Income 7

Bonds & Advanced Features Fundamentals of

© EduPristine CFA L – I\ Fixed Income 8

Bonds & Advanced Features Fundamentals of

Accrued Interest &

Q: If you want to purchase a $1,000 bond with

Q: What is the market price of a ten year, Using Calculator:

© EduPristine CFA L – I\ Fixed Income 9

Bonds & Advanced Features Fundamentals of

Converting a bond equivalent yield (BEY) to an Nominal Spread: Current yield =

Forward rate is a lending rate for a future

© EduPristine CFA L – I\ Fixed Income 10

Bonds & Advanced Features Fundamentals of

Duration & Convexity Other Duration Measures Term Structure Theories

Expectations about short term rates and

© EduPristine CFA L – I\ Fixed Income 11

Bonds & Advanced Features Fundamentals of

Duration & Convexity Other Duration Measures Term Structure Theories

Effective duration (D) = (V--V+)/(2V0(Δy))

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Bonds & Advanced Features Fundamentals of

Duration & Convexity Other Duration Measures Term Structure Theories

DV01/PVBP Duration = - percentage change in bond price / Dollar Duration

PVBP = Duration * 0.01% * Bond Value

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Bonds & Advanced Features Fundamentals of

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1. Which of the following is least likely to be a negative covenant of a bond’s indenture?

B. A provision requiring the company to maintain a current ratio of 2 or higher

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2. Which of the following has the highest call protection?

B. Bonds with prepayment options

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