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31 Cards in this Set
- Front
- Back
Price of T-Period Zero Coupon Bond |
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Forward price of zero coupon bond |
k period bond exchanged at time j |
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Forward pricing model |
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Forward Rate Model |
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Riding the Yield Curve |
Buying longer maturity bonds and selling them before maturity to profit on the difference in yield. Better than buying a shorter term bond and holding till maturity |
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Swap Spread |
Spread Spread = swap rate - treasury yield Swap rate is the fixed rate someone must receive to pay the floating libor rate in exchange |
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TED Spread |
3-month Libor Rate - 3-month T-bill Rate |
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Libor-OIS Spred |
Libor Rate - overnight indexed swap rate |
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Term Structure of Interest Rates |
Unbiased (pure) expectations theory Local expectations theory Liquidity preference theory Segmented markets theory Preferred habitat theory |
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Modern term structure models |
Cox-Ingersoll-Ross: dr = a(b-r)dt + sigmasqrt(r)dz Vasicek model: dr = a(b-r)dt + sigmadz Ho-Lee Model: dr = thetadt + sigmadz |
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Managing Yield Curve Shape Risk |
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Yield Volatility |
Long Term <-- Uncertainty regarding the real economy and inflation Short Term <-- Uncertainty regarding economic policy Long term vol generally < short term vol |
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Value of options |
Value of a call option = Value of straight bond - value of callable bond Value of put option = Value of putable bond - value of straight bond |
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Higher interest rate volatility increases |
Value of call option increases Value of put option increases Value of callable bond decreases (issuer is more protected from volatility) Value of putable bond increases |
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Upward sloping yield curve |
Results in lower call value and higher put value |
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Effective duration |
ED (Callable Bond) < ED (Straight Bond) ED (Putable Bond) < ED (Straight Bond) ED (zero-coupon) ~ maturity of the bond ED (Fixed Rate Bond) < maturity of the bond |
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One sided durations |
Callables have lower down-duration Putables have lower up-duration |
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Minimum value of convertible bond |
greater of conversion rate or straight value |
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Conversion value |
market price of stock x conversion ratio |
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Market Conversion Price |
Market Price of convertible bond ------------------------------------------------- conversion ration |
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Market Conversion premium per share |
Market conversion price - stock's market price |
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Market Conversion Premium Ratio |
Market Conversion premium per share -------------------------------------------------------- market price of common stock |
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Premium over straight value |
market price of convertible bond ---------------------------------------------- - 1 Straight value |
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Callable and Putable Bond Value |
Straight Value of bond + value of call on stock - value of call option on bond + value of put option on bond |
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Recovery Rate
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% of money received upon default money received over money owed |
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Loss given default (%) |
100 - recovery rate |
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Expected Loss |
probability of default x loss given default |
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Present value of expected loss |
Risky Bond Value - risk free bond value |
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Corporate Credit Risk |
value of risky debt = value of risk free debt - value of put option on company's assets equity = European call on company asset's |
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Reduced Form Models |
Impose assumptions on the output of a structural model |
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Credit Analysis of ABS |
ABS do not default but lose value w/ defaults Modeled w/ probability of loss, loss give default, expected loss, present value of the loss |