Study Session 12: Fixed Income: Valuation Concepts
I understand that we use the same concept that we studied in L1 in the Forward Rate Model - (1 + zA)A × (1 + IFRA,B–A)B–A = (1 + zB)B
But I am not able to internalize the concept of the Forward Pricing Model. Can someone pls help or suggest some reading on the net.
I have a question and I hope I do not sound silly.
It came across a discussion whether you can get the implied cost of equity from rental yields expected from property companies.
If Rental yield = NOI/MV and P= D(1+g)/(ke-g) under Gordon growth.
Can we assume that MV = P, therefore NOI/Yield = D(1+g)/(ke-g)?
Assuming that price is fairly price and reflect the pure MV of the underlying property of the Company.
Vol. 5 Reading 37 Section 5 - Valuing Risky Bonds in an Arbitrage-Free Framework - Page 218
Could someone help me arrive at the following discount factors with accompanying formulas
Having passed Level II however, still somewhat not clear about bond’s yield concept and its use in duration calculation. Here I have a real transaction of a zero-coupon bond:
Issue date: Mar 08, 2018
Maturity date: Sep 09, 2018
Trade date: Mar 12, 2018
Settlement date: Mar 13, 2018
Purchase price: 97.60771522
Here are my question:
Does anyone know where the formula for this problem come from? I don’t see it in the LOS.
“Consider a portfolio of zero-coupon bonds that mature at different times in the future. Changes in interest rates are not always parallel across maturities, so let’s analyze what happens as rates change across the yield curve. Let’s assume that the portfolio has sensitivities to factors as provided in Exhibit 3. The portfolio has equal weightings in each key rate duration and an effective duration of 4.7. I would like you to assess the impact on the return of the portfolio if rates rise evenly across the curve and also when the curve flattens but does not twist.”
Can someone please explain how to derive the spot rates and forward rates if the yield rates are given.
Can someone also please explain in detail, how to solve the problem mentioned below.
A 3 year floating rate bond pays annual coupons of one year LIBOR (set in arrears) and is capped at 5.6%. The one year, two year and three year par yields are 2.5%, 3% and 3.5% respectively and interest rate volatility is 10%. The value of capped floater is closest to:
I haven’t been sure on how to differentiate between dominance or value additivity arbitrage. At first I thought it is as simple as just checking whether we need to (for example buy multiple bonds and see one/multiple bonds). I thought dominance would be the case only when two bonds have different prices. However, question 11 in the book in The Arbitrage-Free Valuation Framework has got me confused as they considered that arbitrage dominance as the discount rates are different. I mean discount rates will be always different even with value additivity.
I just want to confirm.
We calibrate binomial tree, because in the exercise tasks (or in the market data) we have just spot rates and we need forward rates. Those spot rates are the spot rates from now until a particular maturity. We need forward rates, because current forward rates are the best estimator for the future one-year spot rates. True?
What I don’t understand is that the values of the bonds in the binomial tree seem to be discounted by a “too early forward rate”. Anyone knows the reason why we assign the discount rates “too early”?
hi fellow members,
while practicing, i came across a question regarding if the interest rate volatility declines, what will be its impact on OAS for callable and putable bond for OAS spread.
As per my understanding, the callable bond value would have gone UP and hence OAS should decrease. for putable bond, value should go down and hence OAS should increase.
However the answer mentions OAS should inrease and decrease for callable and putable respectively.
I am confused now ! Can someone please explain the answer.