***Fixed Income Review***

  1. Know the key aspects of all the debt instruments discussed in Study Session 15 and 16 such as asset backed debt, municipal bonds, sovereign debt, high-yield debt, bullet bonds, serial bonds, floating rate bonds, CMOs, MBSs, mortgage pass-throughs, etc. 2) Know all the concepts we went over in class regarding price-yield curve, duration, convexity, callable bond and non-callable bond. 3) Know how to calculate effective duration 4) Know the market segmentation, pure expectations and liquidity preference theories and how they explain different shapes of the yield curve. 5) Know how to explain YTM, spot rates, static spread (zero volatility spread) and OAS. 6) Know that option value = zvs - OAS 7) Know the two forms of prepayment risk - extension and contraction risk as we discussed in class for CMOs. 8) Know external credit enhancements for ABS. 9) Make sure you can understand and can explain the difference between a cash arbitrage CDO and synthetic CDO and the different tranches (senior, mezzanine, equity) that I went over in class. 10) Know the different forms of credit risk (default, credit spread and downgrade risks). 11) Know the difference between par bond, premium bond and discount bond and the relationship between YTM, coupon yield and current yield for each (which is greater, less, etc.). 12) Know repayment provisions on bonds such as call provisions, put provisions, sinking fund provisions, and refunding provisions. 13) Know the difference between amortizing and non-amortizing securities. 14) Know which types of bonds have more interest rate risk (higher/lower coupon, short/long term to maturity). 15) Know how to calculate the yields I went over in class (current, YTM, etc.) 16) Know what is accrued interest, clean price, full price of a bond. 17) Know how to calculate bond equivalent yield and annual equivalent yield and how to tell which bond is better on a BEY or AEY basis. 18) Know spot rates and how to calculate the price of a bond given a series of spot rates. 19) Know how to calculate and explain absolute yield spread, relative yield spread and yield ratio. 20) Know how to calculate a forward rate given a series of spot rates and how to calculate a spot rate given forward rates.

Could someone please explain the following? 4) Know the market segmentation, pure expectations and liquidity preference theories and how they explain different shapes of the yield curve. --> Is it as simple as what notes state? 9) Make sure you can understand and can explain the difference between a cash arbitrage CDO and synthetic CDO and the different tranches (senior, mezzanine, equity) that I went over in class. Arbitrage CDO: used to profit on the spread between the rate to be earned on the underlying assets and the rate promised to the CDO holder. A balance sheet CDO: used by banks seeking to reduce its loan exposure on its balance sheet? Question: 1. What is synthetic CDO. is it the same with A balance sheet CDO, cuz this concept is not in notes. 2. How does A balance sheet CDO work to reduce loan exposure for banks?

A synthetic CDO is a CDO in which credit exposure is taken through selling credit derivatives, mostly CDS (credit default swaps). The CDO doesn’t actually own any assets but has cash flow through “insurance” by selling protection (hmm…sounds like Tony Soprano). A bank has a bunch of loans on their balance sheet and wants to get rid of them. It sets up some SPV, puts the loans in the SPV, and sells CDO shares to investors. Loans gone from balance sheet because they have sold them investors.