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Study Session 16: Fixed Income: Analysis of Risk

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. 

Madur and convexity

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

Reading #55 Fixed Income Risk/Return

Can someone please explain the difference in using effective duration here, instead of ModDur? They have the exact same formula, except that EffectiveDur uses a benchmark in the denominator instead of the change in YTM, correct? Also, I thought Effective duration was used with embedded options, ie. callable bond…
 
If the question stated find ModDur instead of Effective duration, would the answer also have been B? Just trying to wrap my head around the difference here, as this seems to be the most difficult chapter I’ve run across…
 

Semiannual bond basis

What shall I understand when they say that a yield is stated on a semiannual bond basis is 7% ? Does that mean BEY=7% ?