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32 Cards in this Set
- Front
- Back
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Interest Rate Risk
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adverse change in the price of a fixed income security due to changes in the level of interest rates
If interest rate goes up, the price of a fixed income security will go down. (inverse relationship) |
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Fixed Income Risks
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Interest Rate Risk
Yield Curve Risk Credit Risk |
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Interest Rate Risk Factors
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Maturity – positive relationship
Coupon – inverse relationship Yield – inverse relationship |
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Yield Curve Risk
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investor may not be able to estimate the change in price of a bond portfolio if there is a nonparallel shift in the yield curve
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Key Rate Duration
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an estimation technique to address nonparallel shifts in the yield curve.
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Credit Risk
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Default Risk
Credit Spread Risk Downgrade Risk |
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Liquidity Risk
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risk to an investor that will be difficult to quickly sell
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Reinvestment Risk
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investment rate at which the future cash flows from a fixed income security can be reinvested will decrease.
none for a zero coupon bond |
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Call Risk
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risk that a callable fixed income security will be "pursued" before maturity.
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Event Risk
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Natural Catastrophe Risk
Corporate Take Over Risk Political Risk |
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Volatility
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a drop in the price of a fixed income security
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Exchange rate Risk
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Risk due to Currency Slippage
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Sovereign Risk
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risk of security issued by foreign government where action of the government may result in default or adverse price change.
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Yield to Maturity (YTM) (formula)
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Annual Interest / Current Price
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Coupon Rate (Formula)
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YTM * Bond Price
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Discount Bond
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Current Yield > Coupon Rate
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Premium Bond
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Current Yield < Coupon Rate
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Par Bond
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Current Yield = Coupon Yield
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Warranted Bond Price
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the sum of discounted future cash inflows including the discounted terminal value.
An annual discount rate Kd is given that is divided by 2 when used with semiannual pay bonds. |
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Yield-To-Maturity (YTM)
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the discount rate such that the sum of the discounted present values of the remaining cash flows is equal to the bond price.
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Annual Pay YTM
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[1 + YTM/2]^2 – 1
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Effective Semiannual Yield
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[1 + Annual Pay YTM]^0.5 – 1
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Sources of Return on a Bond
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Coupon Interest Payments
Reinvested coupon interest payments Capital Gain (or Loss) |
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Realized Compound Annual YTM
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([FBIV / BP]^(1/T)) – 1
i = (FV / PV)1/t – 1.] |
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Duration (Formula)
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(V(-) - V(o)) / (2 x V(o) x ΔYTM)
where V(-) = the price if yields declines V(+)= the price if yield increases V(o) is the initial price |
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Approximate % Price Change of Bond (Formula)
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-[Duration x Yield change x 100]
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Dollar Duration (Formula)
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(Duration x Bond Price) / 100
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Convexity Measure (Formula)
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[V(+) + V(-) - (2V(o)]/[2 x V(o) x (Δ YTM)^2]
where V(-) = the price if yields declines V(+)= the price if yield increases V(o) is the initial price |
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Convexity adjustment (Formula)
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estimated convexity x (ΔYTM)^2 x 100
where: ΔYTM = the decimal change in yield to maturity |
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Modified Duration (Formula)
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Macaulay Duration/[1 + YTM/n]
where n=Number of periods/payments per year |
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Effective Duration (Formula)
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[V(-) - V(+)]/[2 * V(o) * ΔYTM]
where V(-) = the price if yields declines V(+)= the price if yield increases V(o) is the initial price |
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Price Value of a Basis Point (PVBP) (Formula)
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Initial price - price if yield is changed by 1 basis point
or Duration * ΔYTM * 100 |
