Fixed Income II - DrWaleKesh

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Term structure and interest rate dynamics 12 Topics

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a. describe relationships among spot rates, forward rates, yield to maturity, expected and realized returns on bonds, and the shape of the yield curve.

b. describe how zero-coupon rates (spot rates) may be obtained from the par curve by bootstrapping.

c. describe the assumptions concerning the evolution of spot rates in relation to forward rates implicit in active bond portfolio management.

d. describe the strategy of rolling down the yield curve.

e. explain the swap rate curve and why and how market participants use it in valuation.

f. calculate and interpret the swap spread for a given maturity.

g. describe short-term interest rate spreads used to gauge economy-wide credit risk and liquidity risk.

h. explain traditional theories of the term structure of interest rates and describe the implications of each theory for forward rates and the shape of the yield curve.

i. explain how a bond’s exposure to each of the factors driving the yield curve can be measured and how these exposures can be used to manage yield curve risks.

j. explain the maturity structure of yield volatilities and their effect on price volatility.

k. explain how key economic factors are used to establish a view on benchmark rates, spreads, and yield curve changes.

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Arbitrage-free valuation framework 10 Topics

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a. explain what is meant by arbitrage-free valuation of a fixed-income instrument.

b. calculate the arbitrage-free value of an option-free, fixed-rate coupon bond.

c. describe a binomial interest rate tree framework.

d. describe the process of calibrating a binomial interest rate tree to match a specific term structure.

e. describe the backward induction valuation methodology and calculate the value of a fixed income instrument given its cash low at each node.

f. compare pricing using the zero-coupon yield curve with pricing using an arbitrage-free binomial lattice.

g. describe pathwise valuation in a binomial interest rate framework and calculate the value of a fixed-income instrument given its cash lows along each path.

h. describe a Monte Carlo forward-rate simulation and its application.

i. describe term structure models and how they are used.

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Valuation and analysis of bonds with embedded options 18 Topics

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a. describe fixed-income securities with embedded options.

b. explain the relationships between the values of a callable or putable bond, the underlying option-free (straight) bond, and the embedded option.

c. describe how the arbitrage-free framework can be used to value a bond with embedded options.

d. explain how interest rate volatility affects the value of a callable or putable bond.

e. explain how changes in the level and shape of the yield curve affect the value of a callable or putable bond.

f. calculate the value of a callable or putable bond from an interest rate tree.

g. explain the calculation and use of option-adjusted spreads.

h. explain how interest rate volatility affects option-adjusted spreads.

i. calculate and interpret effective duration of a callable or putable bond.

j. compare effective durations of callable, putable, and straight bonds.

k. describe the use of one-sided durations and key rate durations to evaluate the interest rate sensitivity of bonds with embedded options.

l. compare effective convexities of callable, putable, and straight bonds.

m. calculate the value of a capped or floored floating-rate bond.

n. describe defining features of a convertible bond.

o. calculate and interpret the components of a convertible bond’s value.

p. describe how a convertible bond is valued in an arbitrage-free framework.

q. compare the risk–return characteristics of a convertible bond with the risk–return characteristics of a straight bond and of the underlying common stock.

Curriculum End of Chapter Questions

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Olawale Keshinro

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Course Includes

3 Lessons
40 Topics