CFA Level I Fixed Income

When market interest rates rise, the prices of existing fixed-rate bonds:

Bond prices and yields move in opposite directions.

A bond has a modified duration of 5. If its yield rises by 1 percentage point, its price changes by about:

ΔP/P ≈ −duration × Δy.

A 2-year bond pays a 5% annual coupon. Its yield to maturity is 5%. What is its price?

When the coupon equals the yield, the bond trades at par.

A bond has a 6% coupon and a 4% yield to maturity. It trades:

A coupon above the market yield makes it worth more than par.

What is the price of a zero-coupon bond paying 100 in 2 years at a 5% annual yield?

100 / 1.05² ≈ 90.70.

A bond pays a $6 annual coupon and trades at $96. What is its current yield?

Coupon / price = 6 / 96.

For an option-free bond, positive convexity means:

Duration alone underestimates the price after a big yield move.

Modified duration is 7 and convexity is 60. Yields rise 1%. What is the estimated price change?

−7 × 0.01 + ½ × 60 × 0.01² = −7% + 0.3%.

Compared with an otherwise identical option-free bond, a callable bond:

The issuer holds the call option, so callable = straight bond − call.

A putable bond is worth:

The investor holds the option.

A company's credit spread widens and the risk-free rate is unchanged. Its bond price:

A higher yield means a lower price.

The probability of default is 2% and the loss given default is 60%. What is the expected loss?

PD × LGD.

Which debt ranks highest in a bankruptcy?

Secured debt is repaid from its collateral first.

What is the lowest investment-grade rating?

Below BBB− is high yield.

When interest rates fall, mortgage-backed securities face:

Extension risk comes when rates rise and prepayments slow.

Why is a securitisation's special purpose entity set up to be bankruptcy-remote?

Investors then depend on the assets, not on the originator's credit.

Which is a negative covenant?

Affirmative covenants say what the issuer must do; negative ones what it must not do.

The 1-year spot rate is 3% and the 2-year spot rate is 4%. What is the 1-year rate one year from now (1y1y forward)?

1.04² / 1.03 − 1 ≈ 5.01%.

Under pure expectations theory, an upward-sloping yield curve means the market expects:

Liquidity preference theory adds a premium for longer maturities.

What is the Macaulay duration of a 5-year zero-coupon bond?

All the cash flow comes at maturity.

A bond is priced at 100 with a modified duration of 5. What is its price value of a basis point (PVBP)?

100 × 5 × 0.0001.

Why does a floating-rate note trade near par on its reset dates, if credit is unchanged?

Its interest rate risk is limited to the time until the next reset.

A bond pays a 6% coupon semi-annually. Two months (60 of 180 days) have passed since the last coupon. What is the accrued interest per 100 of par?

Half-year coupon of 3 × 60/180.

What is a repurchase agreement (repo)?

The haircut protects the lender.

An investor's holding period equals the bond's Macaulay duration. Why does it matter?

This is the idea behind immunisation.

Why do sovereign bonds in the local currency usually carry less default risk than the same government's foreign-currency bonds?

Foreign-currency debt needs foreign currency earned or borrowed.