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Study Session 15: Fixed Income: Basic Concepts

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%

A very different spot rate and forward rate question

Hey guys,

long time lurker here. Preparing for level 1. Just came across this question and have confusion about it. Could you help:

Bond Principal    Maturity (yrs)    Coup Rate    Quoted Yield    Bond price  Zero Coupon(Spot) Rates   Last period implied forward rate

100                     0.25                  0.00%           1.6064              99.6000                      ?                                                ?

Convert between spot & forward rate

Can anyone please help me understand & make a rational or think of consistent formula that I can use to convert between spot & forward rates. I thought I mastered the calculations, then bumped into this question and couldn’t solve it!

Bonds - Stated Annual Yield Periodicity

I’m having trouble with a question and I’m hoping that someone can help. The questions are below. I’ve calculated the Semiannual bond basis yield at 6.47%. 

  1. A stated annual yield based on annual compounding.
  2. A stated annual yield based on quarterly compounding.
  3. A stated annual yield based on monthly compounding.

These are the formulas given:

(1 + (.0647/2))2 = (1 + (SAY/1))1 = 6.58%

(1 + (.0647/2))2 = (1 + (SAY/4))4 = 6.42%

Comparing Yields

Stuck on this question re: the quarterly pay bond (Bold section below) - why am I multiplying the effective quarterly yield by 4 to get the annual YTM?  I sort of understand it but hoping someone can break it down simple for me.  Thank you….

“If a Bond is quoted with a YTM of 4% on a semiannual bond basis, what yields should be used to compare it with a quarterly-pay bond and an annual pay bond?”

SemiAnnual EAY = 1.022-1 = 4.04% to compare against yield on an annual pay-bond.

Justified P/E

Justified P/E = 4.3

If actual P/E is 16, then the asset is overpriced. Completely understood!
But why it’s underpriced if the actual P/E is 7?? yet it’s above the justified ratio of 4.3, so it should be overpriced as well, shouldn’t?!!

Issuer Credit Quality and FRNs

Fixed Income Securities: Defining Elements

(1) If the credit worthiness of the issuer of a 4-year Floating-Rate Note changes drastically in the 2nd year, should not the spread component of the FRN coupon rate (which is fixed at issuance) also be increased along with the yield on the note at that point in time?

Fixed Income

Which of the following is most likely an advantage of collateralized mortgage obligations (CMOs)? CMOs can

  1. eliminate prepayment risk.

  2. be created directly from a pool of mortgage loans.

  3. meet the asset/liability requirements of institutional investors.

C is correct. 

Practical Implications of Bond Spot Rates

If these questions sound naïve to you, please excuse me.

In the real world,

1. If the bond spot and the bond forward rates are declining, is it good or is it bad?

2. If bond prices are increasing, what is the significance of such a situation?

3. If bond prices are decreasing, what is the significance of such a situation?

BEY / EAY / APR / YTM - Please help. Very Confused!!!

Hi, everyone! I am really confused about yields. Could not found appropriate answer.

1) Taking into consideration that BEY = 2* Semiannual effective yield, why then BEY DOES NOT EQUAL to 4 * quarterly effective yield?

2) Is YTM our “stated rate”? So to compute Effective annual return (EAR) we use this YTM.

EAR = [ (1 + stated annual yield / m)m ] - 1 where m - number of compounding periods THEN we can compute