Hi guys, Some quick bond questions. 1) what is the diff between a clean price, ex coupon bond 2) full price and cum coupon Does it mean that clean price is ex coupon since it is the price of the bond and full price is cum coupon. If a coupon is in default, it is said to be trading flat. Can that be called ex coupon too. Another question is regarding CMO’s which have diff tranches. Assume tranche1 pays all the interest and prinicipal . Tranche 2 can pay only when tranche1 principal payments are over. Does it mean that the prepayment risk in tranche 2 is lower than tranche 1.

A simple question for you guys. Any one can help me out here. Thanksk

Here’s my tuppence worth: A semi-annual bond pays out a coupon every 6-mths. If I sell you this bond three months after I’ve just received the last coupon, you will have to pay me not only the price of the bond “Clean Price”, but also the cost of me holding that bond for three months; this extra bit is the “Accrued Interest”. Because I have sold this bond after half of the 6mth period, I am entitled to half of the next coupon payment, otherwise I would have been holding that bond and not receiving any partial return on it. Dirty price is just the sum of these two. Dirty Price = Clean Price + Accrued Int Ex-Coupon: this looks weird to me, but it looks like if someone can detatch the next coupon from a bond and sell it to someone, it is called Ex-Coupon. To be honest, there is probably a good reason why people do this, but I can’t figure it out. Cum-Coupon: this is just a normal coupon bond Do you think these are the type of definitional questions that’ll be thrown at us? Atleast that is my impression after doing a CFAI paper – they definitely seem to be less technical than the Schweser papers…?

Exactly what I am thinking. The CFA questions including quant are more conceptual than calculation intensive. I had another question regarding STRIPS. Lets say we can buy a 1.5 yr treasury security at 986 dollars today. Another option is buying the zero coupon bonds to emulate the coupon bond payment. Assume it pay 6% coupon. Semiannually it needs to pay 30 dollars. If we need to emulate the style using zero coupon bonds, would it mean that we would buy three 0 coupon bonds paying face value 30 ( after 6 mnths ), 30 ( after a yr) and 1030 ( after 1.5) yrs.

Here is my understanding. Someone please tell me if I am wrong: Ex Coupon is where the bond is trading without the coupon (basically the buyer gets the coupon not the seller). If it is trading ex-coupon you need to pay the seller of the bond the accrued interest. In that case you pay Full (dirty) price = clean price + accrued interest. If it is trading cum coupon you pay only clean price. CMO: All tranches get paid interest . However tranche 2 gets the prinicipal payment only after tranche 1 . So tranche 1 gets interest + principal, tranche 2,3 gets interest only. which is why tranche 2 has a lower pre-payment risk

Bcoz for tranche 1 you are getting principal payment too. For 2 and 3 you do not get it till tranche 1 is completely paid for

CMO redistribute prepayment risk and interest risk. Tranche 1 has highest prepayment risk. Last tranche has highest interest rate risk. (high duration).

Pretty much. But beacuse there are three £30 repayments and one £1000 principal payment, I would go for three 6% coupon strips and one 1000 face value principle strip. How does that sound?

Yes that makes more sense