zzzzz~~~can't understand fixed income part.....

CFA Level I
#1

Very disappointed!!! I’ve read notes around three times. But I still can’t fully understand those bonds, especially when interest rate changes what the happens to those factors… So frustrated! Exam is coming. My correct problems acconts very low in the fixed income part… What can I do??

#2
  1. know how to use your calculator 2) draw diagrams for convexity, so you can see what happens when yields change 3) just learn the duration formulae that will get you through most of it.
#3

Just remember that price and yield move in opposite directions. And memorize the price-yield relationship graph with callable and putable bonds.

#4

Thanks guys! But I still have following questions: why longer maturity results in more interest rate risk?? why low coupon rate have the same response too?? how to understand the relationship between interest rate and coupon rate?? And what’s the relationship between YTM and interest rate??

#5

Look in the other post.

#6

Duration is a measure on interest rate risk. It can be measured in percent or years. As a shortcut just remember that the longer the bond’s terms to maturity, the longer its duration, and greater the interest rate risk. Low coupon bonds have low reinvestment risk, but higher interest rate risk and higher duration. Think of interest rate as the compensation required by the market to invest in a particular bond. Think of coupon as compensation offered by the bond issuer. If interest rates are greater than the coupon, the market requires a greater compensation than offered by the issuer. Therefore, the bond would sell at a discount. YTM and interest rates I think are used interchangably most of the time. I must admit though. These notes do a poor job of it. I am hoping these guys to a better job www.elanguides.com

#7

Here’s how I think of interest rate risk: The longer the maturity of the bond, the more of total present ‘value’ of the bond is coming further in the future. The lower the coupon of the bond, the more of the present ‘value’ of the bond is coming further in the future. The further in the future cash flows are, the more sensitive they are to changes in the interest rate. Consider 1, one year from now @ 5% (.95) and @ 10% ($.91). Only a four cent (~4%) difference. Now consider 1, ten years from now @ 5% (.61) and @ 10% ($.38). It’s a 23 cent (~37%) difference.

#8

Sherry! Thats a good explanation. You know your stuff man