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21 Cards in this Set
- Front
- Back
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Spread duration |
Measures % change in relative value = -Ds x change in spread |
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Duration of a floating rate bond |
Time to next coupon reset / 2 |
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Cell matching |
Different than pure replication as manager had discretion in selecting the bonds in each cell to reach required cell weight, also called sampling |
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Multifactor models |
Regression modeling used to select portfolio assets that closely match benchmark risk characteristics
Solves for portfolio allocation, minimizes tracking error
Good - match duration for small parallel shifts Better - match convexity for larger parallel shifts Best - match key rate duration, PV of CF and duration contributions to minimize non parallel shifts (yield curve risks) |
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Key rate duration |
Measures % change in bond if only one point on yield curve changes |
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Bond equivalent yield |
2 x 6 month periodic return Step 1: calc PV of the tail Step 2: calc FV of the coupons Step 3: add 1+2 then divide by price then sqrt ^n (Means payment is 0) Step 4: multiply by 2 to get BEY |
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Dollar duration |
= $ value x duration x 0.01 |
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Rebalancing ratio dollar duration |
Desired DD / Current DD |
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Spreads |
Good = nominal spread = spread vs treasury
Better = zero volatility spread = spread added to spot curve to equate cash flows and price
Best = option adjusted spread = embedded options |
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Value of a callable bond |
= no option bond less call value |
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Value of a putable bond |
= no option bond plus put option |
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# of future contracts to buy to adjust duration |
(Target D - Current D) / Contract D x (Value of Portfolio) / Contract price x Conversion Factor x Yield Beta
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Basis and Basis risk |
Basis = diff btw spot of underlying and the futures price
Should converge at expiration and be 0
Risk is unexpected change and your hedge gets messed up |
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Safety margin |
= difference in PV of Assets less PV of liabilities |
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Contingent "immunization" |
Not immunization, it is active mgmt
Initial overfunding; Requires monitoring of safety margin, if surplus falls to zero then active mgmt failed and go back to real immunization |
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Duration contribution from foreign bond investment |
= foreign bond Duration x country beta relative to domestic |
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Calc minimum spread widening to eliminate yield adv |
= yield adv / duration
For duration pick the highest one |
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IRP |
States that currency should adjust by diff in int rate
Time period = Annual rate / months |
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Duration of a fixed rate bond if no other info |
Assume 75% of the maturity |
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Hedged return vs unhedged |
Hedged = foreign bond return + IRP
Unhedged = foreign bond + mkt expectation |
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Popularity bias |
Higher demand for asset creates upward pressure on its representativeness on the benchmark
Skew value weighted indices
Best is to use equal weight index |
