Study Session 16: Fixed Income: Analysis of Risk

Do Credit Ratings measure severity of loss and default risk or only default risk?

Can’t seem to find an answer in the Schweser. Do their ratings only measure default risk or do they measure both default risk and severity of loss?

Fixed Income Prac. Exam question

Holding other factors constant, increasing a bond’s maturity:

A. Will increase its macaulay duration

B. Will decrease its macaulay duration

C. May increase or decrease its Macaulay duration.

Hello everyone,

This formula is used to calculate % change in price given the % change in interest rates.

% change in price= -(dur)*(delta YTM)+(S)convexity*(delta YTM squared)

I don’t undestand what (S) means?

Sorry for the formula.. I know its not good

This formula is from qbank asnwers.

Can somone explain what does (S) mean?

Regards,

David

Par Value is not given

Hello there,

If par value is not given in bonds problems, what should be the assumption? 100 or 1000?

Fixed Income

Why does the supply condition in a short period of time lead to widening of spread? Shouldn’t the spread be contracting?

thanks

Zero Coupon Bonds

Q:  The largest component of returns for a 7 year zero coupon bond yielding 8% and held to maturity is:

A. Capital Gains

B. Interest Income

C. Reinvestment Income

I said A, as ZCBs are generally purchased at deep discount to par value.  However the answer was B.  I know that C is incorrect.

The answer was B.  Can anyone explain why?

Explain Spot rates?

Can someone explain where do spot rates come from? How or who sets them?

PVBP

I have a question about Price value of basis point. It is written in two ways:

1) PVBP = initial price - price if yield is changed by 1 bp

2)PVBP = [ (V_ - V+) / 2] x par x 0.01

Which one is correct ? Thanks