CFA Level 2 - Fixed Income
, CFA Level 2 - Fixed Income
Spot Rates - Answer: the annualized market interest rates for a single payment to
be received in the future. Generally, we use spot rates for government securities
(risk free) to generate the spot rate curve. Spot rates can be interpreted as the
yields on zero coupon bonds. Spot rates b/c of this may be referred to as zero
coupon rates
forward rate - Answer: an interest rate (agreed to today) for a loan to be made at
some future date.
spot rate (calculation) - Answer: the price today of $1, zero coupon bond is known
as the discount factor, which we will call Pt. B/c it is a zero-coupon bond, the spot
interest rate is the yield to maturity of this payment, which we represent as St.
The relationship between the discount factor Pt and the spot rate St for maturity T
can be expressed as:
Pt= 1/(1+St)to the T
Spot yield curve or spot curve - Answer: the term structure of spot rates - the
graph of the spot rate St versus the maturity T - is known as this. The shape and
level of the spot curve changes continuously with the market prices of bonds.
Forward rate (calculation) - Answer: the annualized interest rate on a loan to be
initiated at a future period is called the forward rate for that period. The term
structure of forward rates is called the forward curve.
, CFA Level 2 - Fixed Income
f(j,k) = the annualized interest rate applicable on a k year loan starting in j years.
F(j,k) = forward price of a $1 par zero coupon bond maturing at time j+k delivered
at time j.
F (j, k) = the discount factor associated with the forward rate
F (j, k) = 1/(1_f(j,k)) to the k.
yield to maturity - Answer: or yield of zero coupon bond with maturity T is the
spot interest rate for a maturity of T. However, for a coupon bond, if the spot rate
curve is not flat, the YTM will not be the same as the spot rate.
Expected returns on bonds - Answer: the ex-ante holding period return that a
bond investor expects to earn
the expected return will be equal to the bond's yield only when all three are true
- the bond is held to maturity
- all pmts (coupon and principal) are made on time and in full
- all coupons are reinvested at the original YTM
the second requirement implies that the bond is option free and there is no
default risk
, CFA Level 2 - Fixed Income
Spot Rates - Answer: the annualized market interest rates for a single payment to
be received in the future. Generally, we use spot rates for government securities
(risk free) to generate the spot rate curve. Spot rates can be interpreted as the
yields on zero coupon bonds. Spot rates b/c of this may be referred to as zero
coupon rates
forward rate - Answer: an interest rate (agreed to today) for a loan to be made at
some future date.
spot rate (calculation) - Answer: the price today of $1, zero coupon bond is known
as the discount factor, which we will call Pt. B/c it is a zero-coupon bond, the spot
interest rate is the yield to maturity of this payment, which we represent as St.
The relationship between the discount factor Pt and the spot rate St for maturity T
can be expressed as:
Pt= 1/(1+St)to the T
Spot yield curve or spot curve - Answer: the term structure of spot rates - the
graph of the spot rate St versus the maturity T - is known as this. The shape and
level of the spot curve changes continuously with the market prices of bonds.
Forward rate (calculation) - Answer: the annualized interest rate on a loan to be
initiated at a future period is called the forward rate for that period. The term
structure of forward rates is called the forward curve.
, CFA Level 2 - Fixed Income
f(j,k) = the annualized interest rate applicable on a k year loan starting in j years.
F(j,k) = forward price of a $1 par zero coupon bond maturing at time j+k delivered
at time j.
F (j, k) = the discount factor associated with the forward rate
F (j, k) = 1/(1_f(j,k)) to the k.
yield to maturity - Answer: or yield of zero coupon bond with maturity T is the
spot interest rate for a maturity of T. However, for a coupon bond, if the spot rate
curve is not flat, the YTM will not be the same as the spot rate.
Expected returns on bonds - Answer: the ex-ante holding period return that a
bond investor expects to earn
the expected return will be equal to the bond's yield only when all three are true
- the bond is held to maturity
- all pmts (coupon and principal) are made on time and in full
- all coupons are reinvested at the original YTM
the second requirement implies that the bond is option free and there is no
default risk
