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Study Session 15: Fixed Income: Basic Concepts

Fixed Income Test Questions

Here are some questions, could someone confirm if the answers are correct ?

1. Which of the following bond categories has typically lower yield to maturity than short-term
treasury bonds?
(a) Long-term treasury bonds. I would say b)
(b) Short-term municipal bonds.
(c) Short-term corporate bonds.
(d) Callable corporate bonds.
(e) None of the above. 


I apologize for trolling, however, some answers are harder to find and swaps are a bit difficult for me to understand. 
I am having trouble with the following question: 

arbitrage-fee pricing

The spot interest rate for a 1-year risk-free investment is 6%, while the forward rate for a
risk-free investment between years 1 and 2 is 7:21% (both annualized). What should be the
arbitrage-free price of a zero-coupon 2-year corporate bond with € 10 000 face value if the
market requires a spread of 250 bp as a risk premium?

Could anyone help me to solve this problem ?
Thanks !

Calculating a discount rate by linear interpolation

The Treasury just issued two types of instruments: a one-year zero-coupon Treasury Bill and
a two-year Treasury Note with 4% annual coupon. If their market prices are 96:20 and 100:40,
respectively, then the 18-month discount rate calculated by linear interpolation is closest to:
(a) 2:86%
(b) 3:76%
(c) 3:87%
(d) 3:91%
(e) 5:83% 

Eurobonds - quick Q

Quick question on Eurobonds:

Let’s say we have a Euroyen bond. I understand that this bond will be issued in the Yen currency, outside of Japan, but does it also mean that the issuing company has to be non-Japanese?

If a Japanese company issues a bond outside of Japan, in the yen currency, is it still called a Euroyen bond (if not, what is it called)?


Sovereign bonds in foreign currency

I was reading that when a Sovereign issues bonds in local currency then the risk is lower since it can print currency to repay the bonds. 

But if it issues the bonds in foreign currency then it could still print local currency, exchange it into the foreign currency and then repay the bonds. So what is the problem with that?

I understand its currency will depreciate either way under both scenarios. 

What am I missing?



Calculating forward rates from spot rates and back

My apologies for seeming to spam the forum with questions. Right now I’m having trouble with solving questions from LOS 52.h; conceptually I think I understand what Im supposed to be doing here but mathematically I cant seem to connect the dots. 

Calculating the full price of a bond

When calculating the full price of a bond and the question does not specify the actual day convention or 30/360 convention, how will I know which one to use. MM states that if its a corporate bond to use the 30/360 convention. Also, in his video he mentions leap years and many other questions using the actual day convention incorporate months that have 31 days. This is embarrassing, but I do not know the specific months that have more or less than 30 days (other than February which has 28). Am I screwed for these types of questions; how do i proceed?

Fixed Income Rates

Hello, can someone please explain the difference between coupon rate and Pass through rate in case of MBS?

Calculating market yield for bonds

Pre-tax                              After-tax            

Year                                   Year     

0            -95                       0            -95

1            4                           1            3.32

2            4                           2            3.32

3            4                           3            3.32

4            104                      4            103.32

IRR        5.4%                    IRR        4.7%