© CSI GLOBAL EDUCATION INC. (2011) 7•3
Such cash ﬂows include the cash ﬂows on assets such as bonds and mortgage-backed securities as well as those for annuity products, life insurance products with interest-rate-sensitive withdrawals, accrued liabilities for deﬁnedbeneﬁt pension funds, and property and casualty liability cash ﬂows. Dellatorre is also very bright, and, therefore, she would like to understand, in general terms, what will happen to her money. theory that investors prefer short-term debt securities over long-term and, therefore, demand a higher yield (risk premium) when purchasing long-term debt securities. The yield curve flattens—that is, it becomes less curvy—when the difference between yields on short-term bonds and yields on long-term bonds decreases. 39
It is therefore prudent to expand your preparation beyond this... ...Part 1
| All of the above | |
A flat yield curve is where longer term maturity bonds and shorter term maturity bonds are close to each other. • Calculating the Current Yield on a Bond
Your boss has developed the following set of questions which you must ask and answer to explain the U.S. financial system to Dellatorre. | Which of the following statements is true? A humped yield curve is where yield increases for a range of maturities and then decreases.
| | 4. 4.1 Price and Yield : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 4.2 More on Duration : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 4.3 Immunization : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 4.4 Convexity optional : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 4.5 Fixed Income Funds : : : : : : : : : : : : : : : : :...... ...maturities can have different interest rates.
Start studying Finance Chapter 6 terms. • Clearing and Settlement
Inverted "Abnormal" Yield Curve: Yield Curve and Bond Valuation
A) A corporate bond's return becomes more uncertain as default risk increases. | | 3. The fair value measurement of the Collateralized Debt Obligation investment shall be categorized within Level 3 of the fair value hierarchy. The different yields currently available on debt securities of similar credit quality according to their term-to-maturity, typically represented graphically. Face value of 1-year bond= 1MM*0.317%=1003170
1. D) risk premium. a. (What are investors expectations?)
Examples of financial assets include stocks （股票，存货）and bonds（债券）. Bond yields (7-7)
|...... ...INTEREST RATE RISK MANAGEMENT: DEVELOPMENTS IN INTEREST RATE TERM STRUCTURE MODELING FOR RISK MANAGEMENT AND VALUATION OF INTEREST-RATE-DEPENDENT CASH FLOWS
1MM* -0.9968%= 5-year bond value *-4.9271%
* Legal entity separate from its owners must be legally formed
What are markets in general? Investors demand higher interest when lending their money for longer periods. • Calculating the Fair Price of a Bond
Analyze the impact of fi xed-income pricing properties on bond prices. Once the newly issued on-the-run bonds become off-the run, the yields on the two bonds converge and LTCM makes a profit. Commonly there are three kinds of Yield Curves that are observed in the financial markets. Chapter 6: Interest Rates
Explain the way in which the default risk and illiquidity premium affect the price of corporate bonds. • The Impact of Maturity
Preface 1 Debt Instruments
A) left; left B) left; right C) right; right D) right; left
...The Financial Environment:
| | 5. Four Types of Firms US | Four Types of Firms AUS |
franking credit=gross div-div=div1-τc*τc
In other words, we want to look at the term structure of interest rates. Pricing and Trading
What are the Fundamental Bond Pricing Properties? Generally, a flat curve is temporary in nature and indicates uncertainty in the market place as to what direction the fed will take. Since 1986 the yield curve has had some measure of humpedness 25% of the time. Bond value when zero-curve shifts up by 1% = 5/1.015+5/1.0155^2+5/1.0165^3+5/1.0175^4+5/1.02^5+5/1.0225^6+5/1.025^7+105/1.0255^8= $118.1528
A yield curve where interest rates on medium-term maturities are higher than rates on both short-and long-term maturities (2) Bonds issued by the same agency but have different term to maturity (i.e. * Double taxation in the US (only concerned with ‘C’ corporations)
In this section, we will focus on only 3 of them: default risk, liquidity, and...... ...© CSI GLOBAL EDUCATION INC. (2011) 7•1
| | 4. Instrument 1 —Collateralized Debt Obligation
Why is a yield curve generally positively sloped? What is the Term Structure of Interest Rates? MD(5) = 5/1.01479= 4.9271, if delta y=1%, delta B/B=-4.9271%
Humped or Flat yield curve – no one knows what economy will do . | profit maximization | 2 |
According to the theory of asset demand, this leads to an increase in interest rate. These are markets where financial assets sold and bought.
The following analysis for classification of each instrument will be based on SFAS 157, which provides a hierarchy of the three-level inputs to the valuation techniques that can be used to measure fair value. 2.
| | 2. Since this part of the course deals with different types of markets, let us start by defining what these markets are. Whenever you exchange something for another you have a market.
| | 5. C. inflation is expected to rise in the future. 3) Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the _____ and the demand curve for Treasury bonds to the _____. In other words, we want to look at the risk structure of interest rates. Andrew Ang* and Michael Sherris†
What can cause an inverted/negative yield curve? Markets are transactions where individuals or organizations exchange items.
B) capitalized risk. * Elected by shareholders
* Corporate tax rate is 34%
If you think about it intuitively, if you are lending your money for a longer period of time, you expect to earn a higher compensation for that. | With perfect negative correlation, the risk on a portfolio can be zero if an appropriate allocation of funds is made | 1 |
Everybody sells the short-term debt in order to buy the long-term debt. • The Yield Curve
2 Bond Arithmetic
4. A yield curve plots the yield to maturity (TYM) of similar debt securities, against the time to maturity (term).A normal yield curve is upward-sloping and shows higher yield for longer maturity due to the risks associated with the passage of time. 3. The rates were picked from the current dates (1st January2012) back to five years a go (1st January 2007).
Learn vocabulary, terms, and more with flashcards, games, and other study tools. • Calculating the Yield on a Treasury Bill
Risk in a portfolio context (8-3)
yield curve from normal to inverted or vice versa. * Ownership represented by shares of stock, sum of which is OE
4 Quantifying Interest Rate Risk
Face value of 5-year bond= 0.2023MM*1.479%=217727
life of the bond). What is an inverted yield curve/negative yield curve? Plotting the points on the basis of the data’s of interest rate and terms to maturity, the yield curve is drawn. | | 5. We will look at the behavior of interest rates of two groups of bonds: (1) Bonds with the same features but are issued by different agency. 1 2
9 14 17 19 23 24 26
• The Relationship Between Bond Prices and Interest Rates
Downward sloping C. Horizontal D. Humped 6-16 Chapter 06 - Working Capital and the Financing Decision 96. 5. - Segmented Market Theory of the Yield Curve. CHAPTER OUTLINE
Explain the rationale for bond switching and describe bond-switching...... ...Q.No. it involves long and short positions of similar instruments. 1. These ideas were pioneered in the actuarial profession by the British actuary Frank Redington (1952). MINI CASE
This is a simple strategy and not necessarily a risky trade since it is very likely that the yields will converge once the on-the-run bonds become off-the-run. * Ultimate decision-making...... ...Chapter 1
The Financial Environment
| | 2. Studies have shown that there have been three factors that affect Treasury returns: (1) change in the level of yield, (2) changes in the slope of the yield curve, and (3) changes in the curvature of the yield curve. -------------------------------------------------
MD = -(118.1528-126.4236)/(2*0.01)*(1/122.2018)= 3.3841
Let's say that on Jan. 2, a two-year note is at 2%, and a 10-year note is at 3%. * Shareholders compute tax at their own tax rate (τp) based on the corporation’s pre-tax income, then subtract the tax paid at the corporate level
The shape of the yield curve changes over time as interest rates change in the marketplace. Defi ne present value and the discount rate, and perform calculations relating to the time value of
1. from: Daisy
Because the interest rates do not change in the same amount of percentages, the yield curve is steeper. • Calculating the Yield to Maturity on a Bond
A yield curve where interest rates on medium-term maturities are higher than rates on both short-and long-term maturities: Term "Normal" Yield Curve: Definition. Bond yields or interest rates are plotted against X-axis while time horizons are plotted on Y-Axis. This creates a rounded or humped curve. A parallel shift in the yield curve is when interest rates across all maturities change by the same number of basis points. A humped yield curve is only a somewhat rare occurrence. | - | |
Yield Curve. A) reduce; increase B) increase; reduce C) increase; not affect D) reduce; reduce E) increase; increase B)... ...1: CORPORATIONS & FINANCIAL DECISION-MAKING
Bond value when zero-curve shifts up by 1% =$118.1528
However, the yield curve can be inverted and downward-sloping if the economy is expected to slow or a recession is imminent.
Stand-Alone risk (8-2)
As this happens, prices on long-term debt rise (yields drop) and prices on short term debt plummet (yields rise). Analysis
• The Impact of Yield Changes
Bond value = 5/1.01+5/1.0105^2+5/1.0115^3+5/1.0125^4+5/1.015^5+5/1.0175^6+5/1.02^7+105/1.0205^8 = $ 122.2018
Essay. These three kinds of yield curve comprise of a normal shaped yield curve, an inverted yield curve and a flat yield curve. * Board of Directors:
| increases as the discount rate increases. Y ield curves are one of the most fundamental measures of the effect on the economy due to various factors and are also an important driver of an economy. A parallel shift in the yield curve neither flattens nor steepens the yield curve. * Sole proprietorship * Partnership * Limited liability company * Corporation | * Sole traders * Partnerships * Trusts * Companies |
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