Module 34.1 LOS 34.c: Bootstrapping Spot Rates
We can derive spot rates from the par rate curve through a process called bootstrapping. Bootstrapping is in iterative process …
fixed income
Module 37.1 LOS 37.a: Explain expected exposure, the loss given default, the probability of default, and the credit valuation adjustment
Expected exposure is the amount a investor stands to lose on risky bond before recovery amounts are taken into consideration. …
Module 38.3 LOS 38.e: CDS Use Cases
Earning arbitrage profits is a motivation for trading in the CDS market. Differences in pricing between asset and derivative markets, …
Module 38.2 LOS 38.c: Valuing a CDS after Inception
At inception of a CDS, the CDS spread (and the upfront premium) is computed based on the credit quality of …
Module 38.1: CDS Features and Terms
A credit default swap acts as an insurance contract. The credit protection buyer is short the swap and received protection …
Module 36.8 LOS 36.o: Calculate and interpret the components of a convertible bond’s value
The conversion value of a convertible bond is the value of the common stock into which the bond can be converted. The …
Module 36.4 LOS 36.g: Calculation and use of OAS
One flaw of using backward induction in the risk-free binomial model is that if we use risk-free rates to model …
Module 36.1 LOS 36.b Explain the relationships between the values of a callable or putable bond, the underlying option-free (straight) bond, and the embedded option
We can view the holder of a callable bond as owning a straight bond and holding a short a call …
Module 36.3 LOS 36.d and 36.e: How changes in the yield curve and interest rate volatility affect the value of a call/put bond
When interest rate volatility increases, both call and put options rise, as volatility increases the chance of the options being …
Module 36.5 LOS 36.i: Compare the effective durations of callable, putable and straight bonds
Because call and put options can reduce the life of a bond, their effective durations will be less than or …