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Study Session 12: Fixed Income: Valuation Concepts

Bootstrapping in Level 2?

Just came across a bootstrapping question in Schweser SS 14 EOC question 12 (pg. 157).

a. Are we going to be asked a bootstrapping question during the level 2 test?

b. How do you solve for Z2/Z3 (step-by-step)? I’m sure I knew this at some point during L1, but for the life of me can’t calculate the correct values for the 2/3 year spot rates.

FI - Reading #50 - Binomial Trees

Are we expected to derive rates on the binomial trees? I’m pulling out my hair trying to figure out how these rates are derived.

Minimum value of a convertible bond

I understand that minimum value of a convertible bond must be greater than the conversion value, becasue if this were not the case then bond can be converted to stock and sell for more. But why should  minimum value be greater than the straight value? Can someone please let me know?

Relative OAS valuation

Hi Folks,

I am having hard time understanding relative OAS valuation concept from study session 14 and reading 50. I am not sure about what exactly is required OAS and what is actual OAS,and why the bond is overvalued in case of treasury benchmark if OAS>0? It will be very helpful if someone could summarize their understanding of this topic.

Reading 48, Q35, financial flexibility, FI/Credit Analysis


I am confused between choice A & C.

35. Based only on FFO/Total debt and FOCF/Total debt ratios for 2006 through 2008 in Exhibit 2, which of the following is the most likely conclusion that can be drawn regarding Fiber Optics?

A. The financial flexibility of the company has improved.
B. Reliance on outside funding for financing has declined.
C. Internally generated sources of funding have grown at a faster rate than external sources.

Key rate duration for Coupon bearing bonds

Hi guys,

In Reading 49, in measuring Yield Curve RIsk for a portfolio, we assume that all the Bonds held in the Portfolio are Zeros, but in real life that may not be the case many a times.

I wonder, how much this Key Rate duration tool, which is pretty straightforward and simple for Zeros, will be helpful to figure out the sensitiveness of Coupon bearing Bonds in a Portfolio to a non-parallel shift in Yield Curve?

Any idea?


Yield of Callabale/Non Callable Bond

I encountered this question, looking for the answer. Yield = RFR + OAS Is this statement True/False for Callable and Non-Callable bond?