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Study Session 15: Fixed Income: Basic Concepts

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

Why do banks securitize their assets?

Hello everyone,

Regarding securitization process, some benefits to the banks, who sell securitized assets to SPVs, are suggested by the curriculum such as increasing profitability and efficiency for the banks and that they can lend out more.

However, when selling those securitized assets, don’t banks sell them at present values (which means they give up all of the interests in the future)? If that is the case, are they actually increasing profitability through securitization and what is the point (to the banks) of getting money to lend out more?

LIBOR - current LIBOR interest rates | Negative Interest Rates - Real world application

Hi all

LIBOR is mentioned throughout the CFA curriculum - I am just trying to understand the real world application. I wonder if someone would kindly shed some light on this?

Having seen the euro LIBOR rates from overnight to 12 months - they are all negative, i.e. -0.21514 %. I don’t understand why they are negative and if these negative rates are used in investments?

If there is a class of bonds with a spread of 100 bps over 12 month euro LIBOR. Does this mean that it will pay interest of -0.21514% + 1%?