Fixed Income Securities

[June 2013 CFA Level 1 Group]

Use this discussion thread to ask and discuss queries related to Fixed Income Securities Topic

[Subramanian L V]

can u explain the curriculum questions 18,19, 21 of the reading 54

[Subramanian L V]

Can anyone pls explain how do we do the Q no 35 in the Reading 57(yeild measures,spot & forward rates) of the curriculum

[haidriqbal]

Which of the following statements about floating-rate bonds is most accurate?

A) With a perfect, continuously resetting coupon rate, a floating-rate bond's value would always equal par.

B) Holding a floating-rate bond eliminates price fluctuations.

C) A cap rate can increase the price volatility of a floating-rate bond.

Your answer: A was incorrect. The correct answer was C) A cap rate can increase the price volatility of a floating-rate bond.

At yields above the cap rate, the price volatility of a floating-rate bond with a cap is similar to that of a fixed-rate bond. Holding floating-rate bonds minimizes but does not eliminate price fluctuations. Even if its coupon rate reset continuously, a floating-rate bond could have a price different from par due to changes in the solvency of the issuer.

Please explain 

[Lalitha Sravanthi]

read the reading on volatality effect on interest rates, i think in the reading 53. 

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Regards
Lalitha Sravanthi Mutharaju 

[haider iqbal]

Okay I will do that. 

Randy Harris is contemplating whether to add a bond to his portfolio. It is a semiannual, 6.5% bond with 7 years to maturity. He is concerned about the change in value due to interest rate fluctuations and would like to know the bond’s value given various scenarios. At a yield to maturity of 7.5% or 5.0%, the bond’s fair value is closest to:

7.5%

5.0%

A) 974.03 1,052.36

B) 946.30 1,087.68

C) 1,032.67 959.43

Your answer: B was correct!

Given a YTM of 7.5%, calculate the value of the bond as follows:
N = 14; I/Y = 7.5/2 = 3.75%; PMT = 32.50; FV = 1,000; CPT → PV = 946.30

Given a YTM of 5.0%, calculate the value of the bond as follows:
N = 14; I/Y = 5/2 = 2.5%; PMT = 32.50; FV = 1,000; CPT → PV = 1,087.68

Now I understand this question but I did not use the calculator to answer it I just want to know if my reasoning was accurate.

I assumed convexity to be positive. Thus the price had to go down if Yield went up and vice versa hence eliminating C.

Since the difference between the YTM and coupon is 1 and 1.5 respectively I assumed that the increase/decrease had to be close to such a proportion.

Now I got the right answer of course but was my logic correct or should I just start using my calculator for these things.

[Arif Irfanullah]

Haider,

You've made two statements:

1. I assumed convexity to be positive. Thus the price had to go down if Yield went up and vice versa hence eliminating C.
   
2. Since the difference between the YTM and coupon is 1 and 1.5 respectively I assumed that the increase/decrease had to be close to such a proportion
   

The first one is correct.  The second one does not make sense to me.  

To be safe I suggest you do this on the calculator. It should only take 30 seconds.

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[Arif Irfanullah]

The FIS quiz and solution is available here.

Please do the quiz and share your feedback.  

The video response to questions will be available 12 Noon GMT, 24 May.

[Michael Frye]

Reading 57, video part 2, on slide 16 "bootstrapping": 100= 12/1.10 + 112/ (1 + X)^2. I know from the video that the answer is x= .1212. I know this is simple algebra but it is tripping me up a bit. Can someone extend at little help in solving for X. Thanks. 

Michael

On Tue, Feb 12, 2013 at 10:16 AM, June 2013 CFA Level 1 Group <june-2013-cfa...@googlegroups.com> wrote:

Use this discussion thread to ask and discuss queries related to Fixed Income Securities Topic

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[Rajan Kumar]

here it goes:

 

100=12/1.1 + 112/(1+x)^2

112/(1+x)^2=100-10.9

(1+x)^2=112/89.1

(1+x)^2=1.257

1+x=sq. root of 1.257

1+x=1.121

x=1.121-1

x=.121

 

Thanks,

Rajan