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Questions tagged [fixed-income]

Securities which obligate the borrower/issuer to make payments on a fixed schedule. Fixed income securities include sovereign, corporate and municipal bonds, corporate loans, and securitized lending (e.g., ABS). "Fixed" refers only to the schedule of obligatory payments, not the amount, and may include inflation linked bonds, variable-interest rate notes, and the like.

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353 views

How do bond traders get all the different moving parts?

I've been working with this trader and every time he explains something to me, it sound like foreign language. There's so many things going on. I'm a graduate analyst on the bond trading desk and I ...
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1answer
632 views

Treasury Bill and Treasury Bond : Quoted Price VS Cash Price VS Value of Bond

I have confused by three concepts and following is my understanding: Quoted Price and Cash price are totally different things ...
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2answers
175 views

What does Buying 5 year and hedging with 2 year and 10 year mean?

I hear this during morning meetings where traders are making references to buying the 5 year and hedging with 2 year and 10 year? Does this mean that the position is neutral to overall movements in ...
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1answer
70 views

Bond ETF Dividends

Bond ETFs usually make monthly dividend payments. The ETF manager receives quarterly or semiannual coupons on the underlying bonds in the ETF. What is the time delay between the coupons received and ...
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2answers
260 views

Floating rate note value approximation

I was hoping somebody can assist me with a query. Would it be a valid approach to revalue a frn with a discount margin from a comparable bond as par minus the difference between the quoted margin and ...
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1answer
842 views

How is Bloomberg's fixed-equivalent yield on a floater calculated?

What is fixed-equivalent yield and how is it derived? Thanks!
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2answers
1k views

Cash-settled swaptions

I was wondering, what is the motivation behind the payoff of the cash swaptions being multiplied by the swap annuity? $$c(S_{\theta, T})=\sum_{i=\theta+1}^{T}\tau_i\frac{1}{{(1+S_{\theta,T}(\theta))}^...
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0answers
345 views

Importance of z-spread in CDS-Bond Basis trading

Consider the following: A bond with a 9% coupon and a price of $98. Let's say the zero swap curve is flat at around 7% (e.g. the zero swap curve is high because we're at the end of a business cycle). ...
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3answers
7k views

Carry calculation on an interest rate swap

I was hoping that I can get help on a simple yet not so straight forward topic : Looking at valuing the costs of holding an IRS in the books this would entail marketed-to-market due to price ...
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1answer
610 views

Roll down Treasury curve (Coupon effects)

I'm currently working on roll down calculations for the Treasury curve (3-month roll, 6-month roll, etc..). One of the senior guys (I just started out of college) asked me to adjust for the coupon ...
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1answer
2k views

Carry and roll (upfront vs running)

I am still confused regarding the differences between upfront and running. If two bonds have a spread of 50bp, does that equate to 50bp in total return over the course of the year or do I have to ...
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1answer
178 views

Do price approximations lead to arbitrage opportunities?

Do price approximations lead to arbitrage opportunities against a price computed using the exact formula? For instance, dirty bond price uses a linear approximation to compute the accrual interest: $$...
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1answer
94 views

Short-rate models: Risk-premium of $T$-bonds

Following "Arbitrage Theory in Continuous Time" by Thomas Bjork, a standard one-factor short-rate model is of the form \begin{align*} dr_t = \mu(t,r_t)dt + \sigma(t,r_t)dW_t. \end{align*} The only ...
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1answer
444 views

How to roughly estimate long term term premia?

Is there a way to crudely estimate term premia in long term bonds? I understand there is a well developed and widely available model from the NY Fed (ACM Model) but I'm wondering if there is a 'quick ...
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1answer
114 views

Interest rate risk using copulas

In order to simulate an interest rate yield curve, can I just estimate a covariance matrix of historical key rate data, simulate with a normal copula, spline my simulated key rates, then price my ...
2
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1answer
344 views

Why Hull White 2 Factor model can't capture vol skew?

Is there a way to stay with the short rate model (like HW2F or G2++) but extend it to capture vol term structure (vol smile or skew). What happens if I calibrate HW2F to OTM swaptions? (I don't want ...
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1answer
246 views

A very simple question about convexity of a bond

I was always under the impression that, ceteris paribus, higher the coupon rate, higher the convexity of the bond. But Investopedia says the following: "zero-coupon bonds have the highest degree ...
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2answers
62 views

Does the FED lend directly to commercial&investment banks or is there an intermediary

I has looking at this video on how interest rates are set. When the process of borrowing from the FED to commercial banks is explained, another entity is described(around 00:40). So when the FED ...
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1answer
112 views

What is a central bank's shadow rate

I was reading a WSJ article about the European Central Bank shadow rate, which is -5.1% at the moment. The article says about the shadow rate that "Calculated with the rates on longer-dated credit ...
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4answers
104 views

How can a rise in real yields raise borrowing costs

I was reading this article which has this paragraph: One concern for investors is that a rise in real yields would raise borrowing costs, increasing the debt burden of consumers and businesses. That ...
2
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1answer
3k views

Z-Spread vs Discount Margin

I'm comparing two types of discounting: Z-Spread and Discount Margin. Reading the article by O'Kane Credit Spread Explained I found Z-Spread is used for fixed rate notes meanwhile Discount Margin, ...
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3answers
1k views

What curve are you shifting when you calculate DV01 for a swap?

I understand that a general swap has 4 curves attached to it: the flat forecast curve associated with the fixed leg, the forecast curve associated with the floating leg, the fixed leg discount curve ...
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3answers
163 views

Alternate explanation of Duration

In many reputed sites such as, Investopedia, bond duration is explained as a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows. My ...
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1answer
211 views

Discounted cash flows for bond valuation: exponential and simplified

At the moment I'm working with a banking system that calculates the discounted cash flows of a bond product in the following manner: It uses the 'regular', exponential way of calculating discounted ...
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1answer
1k views

What exactly is a deposit futures contract?

I have been working with Deposit Futures and the Brazilian One-Day Interbank Deposit Future but I can't get my head around them. What exactly is delivered and when? What is the contract a right to?
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1answer
80 views

Literature on credit risk premia

I am looking for a comprehensive ressource describing known strategies of credit risk premia. Is there such kind of articles/books/websites?
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2answers
973 views

Interpretation of OAS on MBS

I'm struggling a little with the interpretation of option adjusted spread on mortgage backed securities. I can see how, for a corporate bond without optionality, the z-spread is sort of like a ...
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1answer
43 views

US Treasury foreign buying/selling data

Would anyone recommend any Index or data that I can avail to understand the trend in buying/selling of US treasuries by China? I have access to Reuters feed. Thanks, Sumit
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1answer
601 views

Valuing the floating leg of a swap

Let $P_{t}(\pi)$ be the price at time t of a zero coupon bond with time to maturity $\pi$. Furthermore, let $f_{t}(\pi_1, \pi_2)$ be the forward rate that is earned over the time period $[\pi_1, \pi_2]...
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1answer
256 views

Volatility considerations with interest rate derivatives

I am a bit confused about the practical use of vol surfaces used for derivative pricing. We know that the two main products that best represent market volatility are caps and swaptions, from which ...
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0answers
43 views

How to estimate bond price returns via an index?

Let's say I have a corporate bond, for which I know current yield, modified duration, coupon and maturity. I want to estimate how it would have performed under certain market conditions by looking at ...
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1answer
99 views

Cap option on Libor

We denote discount factor $D(t),$ zero coupon bond $B(t,T),$ $E_t[X] = E[X|\mathcal{F}(t)]$ and $T$-forward measure $E_t^{T}[\ ]....
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1answer
429 views

Is Libor a martingale under T-forward measure

We denote discount factor $D(t)$, and zero coupon bond $B(t,T)$ as: $$B(t,T) =\dfrac{1}{D(t)} E_t[D(T)]$$ here $E_t[X] = E[X|\...
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1answer
38 views

£ converted spread

I've been looking at US bank loans and would like to convert the spread that has been quoted to another currency. And I'm not quite sure how this can be done. Say I'm a £ investor and have invested ...
3
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3answers
145 views

Why aren't option pricing models more frequently used to value risky cash flows?

One way to think of the value of a risky firm is through expected measure theory. On the most basic level, the value of any asset is the convolution of the probability density function of its risky ...
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0answers
106 views

Pricing Options on Fixed Income ETFs

The market for trading options on fixed income ETFs like HYG has become increasingly prominent in the past couple years, but I've been unable to find any discussion related to the pricing methodology ...
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3answers
3k views

Why is G spread bigger than Z spread theoretically?

I am checking a few bonds on the YAS page on Bloomberg and I can see that G is higher than Z spread (this applies to bonds with optionality and bullet, too). As Z is stripped from reinvestment risk, ...
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1answer
756 views

Total Return Bond Index calculation using only Clean and Dirty prices

I have been looking at ways to construct a custom Total Return Bond Index given only the Clean and Dirty Prices. First I constructed the following, thinking that Price Index formula would capture ...
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2answers
117 views

Bond Valuation and liquidity

Assuming the market is perfect liquid, the bond price can be replicated and is related as follows: $$\sum_{t=0}^{N}c_ne^{-Y(t_n-t)}=\sum_{t=0}^{N}c_nP_{t_n}=\sum_{t=0}^{N}c_ne^{-Y_{t,t_n}(t_n-t)}$$ ...
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1answer
81 views

why swap rate not dependent on valuation date?

When I review my course on swaps, I read the following sentence: the value of the swap rate is independent of the valuation date(even though the PV's of the individual legs of the swap are clearly ...
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3answers
703 views

Receiver Swaption and Callable Bond - Literature Proof?

I'm looking for a formal proof that a receiver swaption is equivalent to a callable bond. I have only found some CFA Internet pages so far where this statement is considered as proven, tough I haven'...
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2answers
415 views

Fixed Income VaR: Yield Vol vs Cash Flow Mapping

I have come across two ways of measuring VaR for Fixed Income instruments thus far: Express the volatility in of basis points and the position in terms of sensitivity to a 1 basis point movement in ...
4
votes
1answer
345 views

Fitting the Term structure of Discount Bonds with Ho-Lee

I was now reading a book on interest rate modelling, and I am having trouble picturing the practical issues of model calibration with the Ho-Lee model. Apparently, one of the drawbacks of this model ...
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1answer
106 views

Yield-to-maturity determines bond price or viceversa?

when I attended fixed-income classes, my Professor used to say that yield-to-maturity determines bond price and not viceversa. I was wondering the meaning of this statement since the definition of ...
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1answer
53 views

Calculating the Cost of Delay

I am working on a problem in Davidson and Herskovitz workbook titled the Mortgage-Backed Securities Workbook. The questions asks to find the total opportunity cost to the investor of having a $1 ...
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1answer
116 views

General Mortgage Backed Securities

I understand the basic workflow of MBS, such as securitization, and.etc. I was wondering the following things: The relationship between agency product, securities, and pools: Is ONE security exactly ...
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1answer
3k views

What are Generic government treasury bonds? (Bloomberg terminal)

I have a project at school were we are supposed to find the generic series for US treasury bonds, and then download daily data for 3 years. I have found the bb ticker, but i don't understand the ...
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0answers
32 views

Floor option EVE risk: Sum of key rate shocks risks vs. the rates parallel shock risk

Consider a model measuring the EVE risk (change in the economic value by shocking the rates; PV01) of a portfolio of vanilla interest rate floor options. Is there any reason for the EVE risk of a ...
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2answers
162 views

Making mathematical sense of the expression for realized bond return

I came across the following statement regarding the realized 10-year maturity bond's return over a year: The realized bond return (H) over a year has two components: the yield income earned over ...
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1answer
158 views

Does this trade have a name?

Ok so I got this idea, it's very simple so I know I'm not the only one who has thought about it. It is a pairs trade between long and short term treasury swaps, and goes as follows: Going by ...