Questions and Answers of Fixed Income Analysis

compare eff ective convexities of callable, putable, and straight bonds;
describe the use of one-sided durations and key rate durations to evaluate the interest rate sensitivity of bonds with embedded options;
compare eff ective durations of callable, putable, and straight bonds;
calculate and interpret eff ective duration of a callable or putable bond;
explain how interest rate volatility aff ects option-adjusted spreads;
explain the calculation and use of option-adjusted spreads;
calculate the value of a callable or putable bond from an interest rate tree;
explain how changes in the level and shape of the yield curve aff ect the value of a callable or putable bond;
explain how interest rate volatility aff ects the value of a callable or putable bond;
describe how the arbitrage-free framework can be used to value a bond 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 fi xed-income securities with embedded options;
describe a Monte Carlo forward-rate simulation and its application.
describe pathwise valuation in a binomial interest rate framework and calculate the value of a fi xed-income instrument given its cash fl ows along each path;
compare pricing using the zero-coupon yield curve with pricing using an arbitrage-free binomial lattice;
describe the process of calibrating a binomial interest rate tree to match a specifi c term structure;
describe the backward induction valuation methodology and calculate the value of a fi xed-income instrument given its cash fl ow at each node;
describe a binomial interest rate tree framework;
calculate the arbitrage-free value of an option-free, fi xed-rate coupon bond;
explain what is meant by arbitrage-free valuation of a fi xed-income instrument;
describe collateralized debt obligations, including their cash fl ows and credit risk.
describe types and characteristics of non-mortgage asset-backed securities, including the cash fl ows and credit risk of each type;
describe the characteristics and risks of commercial mortgage-backed securities;
explain the motivation for creating securitized structures with multiple tranches (e.g., collateralized mortgage obligations), and the characteristics and risks of securitized structures;
describe types and characteristics of residential mortgage-backed securities, and explain the cash fl ows and credit risk for each type;
describe types and characteristics of residential mortgage loans that are typically securitized;
describe the securitization process, including the parties to the process, the roles they play, and the legal structures involved;
explain benefi ts of securitization for economies and fi nancial markets;
compare the credit analysis required for asset-backed securities to analysis of corporate debt.
calculate and interpret the present value of the expected loss on a bond over a given time horizon;
explain the determinants of the term structure of credit spreads;
explain assumptions, strengths, and weaknesses of both structural and reduced form models of corporate credit risk;
explain reduced form models of corporate credit risk, including why debt can be valued as the sum of expected discounted cash fl ows after adjusting for risk;
explain structural models of corporate credit risk, including why equity can be viewed as a call option on the company’s assets;
explain strengths and weaknesses of credit ratings;
explain credit scoring and credit ratings, including why they are called ordinal rankings;
explain probability of default, loss given default, expected loss, and present value of the expected loss, and describe the relative importance of each across the credit spectrum;
explain special considerations when evaluating the credit of high-yield, sovereign, and non-sovereign government debt issuers and issues.
describe factors that infl uence the level and volatility of yield spreads;
evaluate the credit quality of a corporate bond issuer and a bond of that issuer, given key fi nancial ratios of the issuer and the industry;
calculate and interpret fi nancial ratios used in credit analysis;
explain the four Cs (Capacity, Collateral, Covenants, and Character) of traditional credit analysis;
explain risks in relying on ratings from credit rating agencies;
distinguish between corporate issuer credit ratings and issue credit ratings and describe the rating agency practice of “notching”;
describe seniority rankings of corporate debt and explain the potential violation of the priority of claims in a bankruptcy proceeding;
describe default probability and loss severity as components of credit risk;
describe credit risk and credit-related risks aff ecting corporate bonds;
explain how changes in credit spread and liquidity aff ect yield-to-maturity of a bond and how duration and convexity can be used to estimate the price eff ect of the changes.
describe the relationships among a bond’s holding period return, its duration, and the investment horizon;
describe how the term structure of yield volatility aff ects the interest rate risk of a bond;
estimate the percentage price change of a bond for a specifi ed change in yield, given the bond’s approximate duration and convexity;
calculate and interpret approximate convexity and distinguish between approximate and eff ective convexity;
calculate and interpret the money duration of a bond and price value of a basis point (PVBP);
calculate the duration of a portfolio and explain the limitations of portfolio duration;
explain how a bond’s maturity, coupon, embedded options, and yield level aff ect its interest rate risk;
defi ne key rate duration and describe the key use of key rate durations in measuring the sensitivity of bonds to changes in the shape of the benchmark yield curve;
explain why eff ective duration is the most appropriate measure of interest rate risk for bonds with embedded options;
defi ne, calculate, and interpret Macaulay, modifi ed, and eff ective durations;
calculate and interpret the sources of return from investing in a fi xed-rate bond;
compare, calculate, and interpret yield spread measures.
defi ne forward rates and calculate spot rates from forward rates, forward rates from spot rates, and the price of a bond using forward rates;
defi ne and compare the spot curve, yield curve on coupon bonds, par curve, and forward curve;
calculate and interpret yield measures for fi xed-rate bonds, fl oating-rate notes, and money market instruments;
describe matrix pricing;
describe and calculate the fl at price, accrued interest, and the full price of a bond;
defi ne spot rates and calculate the price of a bond using spot rates;
identify the relationships among a bond’s price, coupon rate, maturity, and market discount rate (yield-to-maturity);
calculate a bond’s price given a market discount rate;
What additional sources of funds are available to banks?
What types of bonds are issued by governments, government-related entities, fi nancial companies, and non-fi nancial companies?
How are bonds sold in primary markets and traded in secondary markets?
What are the key bond market sectors?
describe repurchase agreements (repos) and their importance to investors who borrow short term.
describe short-term funding alternatives available to banks;
describe types of debt issued by corporations;
describe securities issued by sovereign governments, non-sovereign governments, government agencies, and supranational entities;
describe secondary markets for bonds;
describe mechanisms available for issuing bonds in primary markets;
describe the use of interbank off ered rates as reference rates in fl oating-rate debt;
describe classifi cations of global fi xed-income markets;
What types of provisions may aff ect the disposal or redemption of fi xed-income securities?
What are the common structures regarding the payment of interest and repayment of principal?
What are the legal, regulatory, and tax considerations associated with a fi xed-income security, and why are these considerations important for investors?
What set of features defi ne a fi xed-income security, and how do these features determine the scheduled cash fl ows?
describe contingency provisions aff ecting the timing and/or nature of cash fl ows of fi xed-income securities and identify whether such provisions benefi t the borrower or the lender.
describe how cash fl ows of fi xed-income securities are structured;
describe how legal, regulatory, and tax considerations aff ect the issuance and trading of fi xed-income securities;
compare affi rmative and negative covenants and identify examples of each;
describe functions of a bond indenture;
describe the basic features of a fi xed-income security;
A four-year corporate bond with a 7% coupon has a Z-spread of 200 bps. Assume a flat yield curve with an interest rate for all maturities of 5% and annual compounding. The bond will most likely
The Z-spread of Bond A is 1.05% and the Z-spread of Bond B is 1.53%. All else equal, which statement best describes the relationship between the two bonds?A. Bond B is safer and will sell at a lower
In most countries, the bond market sector with the smallest amount of bonds outstanding is most likely the:A. government sector.B. financial corporate sector.C. non-financial corporate sector.
The bond’s annual yield-to-first-call is closest to:A. 3.12%.B. 6.11%.C. 6.25%. End of Year Call Price 3 4 5 102 101 100
The 3-year implied spot rate is closest to:A. 1.18%.B. 1.94%.C. 2.28%. Time Period Forward Rate "Oyly" "lyly" 0.80% 1.12% "2yly" 3.94% "3yly" 3.28% "4yly" 3.14%
When valuing securities with embedded options, why is it important to consider volatility explicitly?
What is the Z-spread?
What is the option-adjusted spread?
What is the option cost?
How are the Z-spread, option-adjusted spread, and option cost related?

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