Study Session 15: Fixed Income: Basic Concepts
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%
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 ? ?
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!
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%.
- A stated annual yield based on annual compounding.
- A stated annual yield based on quarterly compounding.
- 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%
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 = 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?!!
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?
Which of the following is most likely an advantage of collateralized mortgage obligations (CMOs)? CMOs can
eliminate prepayment risk.
be created directly from a pool of mortgage loans.
meet the asset/liability requirements of institutional investors.
C is correct.
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?
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
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