# Study Session 13: Fixed Income: Topics in Fixed Income Analysis

## CDS spread

Hi guys, just a quick question because it seems that I got confused.

If you have a bond in your portfolio and you want to hedge for credit risk, are you buying or selling the CDS?

## Winters AM - Binomial IR tree question

Winters AM is a fixed income management firm that invests in a wide variety of debt instruments. Lauren Winters, CFA is focusing on bonds with embedded optionality. She builds the following binomial IR tree based on 10% vol. Her goal is to value a new annual pay 4.5% bond, callable at 100.5 and maturing in 3 years with a par value of $100.

Q43. The value of the bond is closest to:

a) 102.26

b) 102.76

c) 102.82

can someone please talk me through this one as I am lost! thanks

## Callable bonds

Hello,

Can anyone help me understand why the price of the callable bond is capped by the price of the call option if it is near the exercise date.

Thank you!

## CDS - Recovery Rate/Payout Rate

Hello, I am confused by an example given in Book 39 (CDS - the last Fixed Income Book). They say if a CDS defaults, the buyer will receive 1-recovery rate * notional amt. Infact, they give 1 or 2 examples after this is explained. But in Section 3.1, they give another example:

## Key rate duration

Does anybody understand why a bond trading at a premium has a positive key rate duration while a discount bond has a negative key rate duration?

## Z spread and Option Adjusted Spread

We have 3 Bonds:

Bond A Bond B Bond C

Z-spread 130 150 135

OAS 140 125 135

Why Bond A is more likely to have put option embedded than Bond B?

Is Z-spread = OAS - Call Option, and Z-spread = OAS + Put Option.

The higher the OAS, the lower the price of Bond, isn’t it?

## Credit Analysis Models - CVA Calculation

Hi guys,

I’m going through EOCs on the new Credit Analysis Models chapter. Calculating the CVA and fair value of a bond is blowing my mind a little.

Has anyone got any useful tips they can share for calculating the value of CVA to deduct from the calculated price? LGD and POD calcs are relatively new to me. The first couple of EOC questions need a lot of calculations so I’m wondering if they’ll even test this, but given its a new reading I don’t want to take the chance.

Thanks all!

## Flattening of yield curve & option price

Why does a flattening of a yield curve result in an increase in the price of an option?

If that doesn’t make sense.. how do yield curve shapes affect option prices? (Context of callable/puttable)

## FIXED INCOME -- Effective Duration

Hello there fellow CFA Tribe Members ~

What is the unit of measure ascribed to effective duration –

i) XX% of bond price OR

ii) years

Case in point, under reading 37, section 4.1.1, the author illustrates an example with the solution being, “an effective duration of 1.97 indicates that a 100-bps increase in interest rate would reduce the value of the three-year 4.25% callable bond by 1.97%.”

## FIXED INCOME -- Interest Rate Volatility and OAS

I have a few questions about the following statement that was made in R37 (Summary), excerpted as: “OAS is sensitive to interest rate volatility: The higher the volatility, the lower the OAS for a callable bond.”

1. For a callable bond, wouldn’t one expect the OAS to be greater than its equivalent for a putable bond because it is the bondholder that is taking most of the risk ?

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