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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questions
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Which approach is better for modeling option exercise strategies, rational or behavioral?
This question is most relevant to the evaluation of embedded options, such as the refinancing option granted to borrowers in the mortgage and bank loan markets, or the call option present in some ...
6
votes
1answer
3k views
How would I value a perpetual bond with an embedded option?
I am trying to work out how to value the following transactions. It should be straight forward, since it breaks down into a series of well known instruments, yet I am not sure how to evaluate it:
...
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votes
1answer
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What is the replicating portfolio of swaptions for a constant maturity swap (CMS)?
How do you replicate the payoff of a constant maturity swap rate?
That is, if the payoff of a contract pays the 5-year swap rate every year for 10 years, how would you replicate this payoff using ...
7
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2answers
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Why is there a price difference between 30 year principal and interest STRIPS?
Sorry if this is obvious, I am not a professional. I like to trade 30 year treasury zero's.
I have noticed that the price for a 30 year principal payment is never the same as a 30 year interest ...
7
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1answer
5k views
Correct way to calculate bond's Yield-to-Horizon
I'm creating some .Net libraries for bond pricing and verifying its correctness with a bond pricing excel spreadsheet (Bond Pricing and Yield from Chrisholm Roth) but I believe it calculates the Yield ...
6
votes
1answer
831 views
How to value a floor when a loan is callable?
Certain bank loans pay a spread above a floating-rate interest rate (typically LIBOR) subject to a floor. I would like to find the value of this floor to the investor. Assume for this example that ...
11
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1answer
311 views
How to handle coupon payments when pricing a bond with an embedded option?
I'm using a binomial tree to price a bond that has an embedded call or put option.
On every node that has a coupon payment, do you include the coupon payment then max/min out the value, or do you max/...
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votes
1answer
6k views
How to estimate probability of default from bond prices?
How do you use bond prices/yields to infer probabilities of default? I would think of it as follows:
Create a relationship between default free (e.g., Germany) and defaultable (e.g., Greece) bond ...
11
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2answers
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Why is the SABR volatility model not good at pricing a constant maturity swap (CMS)?
I have heard that the SABR volatility model was not good at pricing a constant maturity swap (CMS). How is that?
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2answers
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Is Duration really the slope of the Price-Yield curve?
When looking at the Price-vs-Yield graph for a fixed rate instrument, we are often told that the duration is the slope of that curve. But is that really right?
Duration is (change in price) divided ...
10
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1answer
802 views
How to build the short end of a zero coupon curve for non-core Eurozone countries?
I am in the process of building zero coupon curves for some countries in the Eurozone.
I have the following data sets:
Euribor and EONIA
Swap rates
Bond price and yields
The bond prices (and thus ...
9
votes
4answers
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What is the connection between default probabilities calculated using the credit rating and the price of a CDS?
I'm working on a tool to price Credit Default Swaps. I've already done the standard pricing tools. I'm working on a pricing tool which uses the credit rating for the default probabilities used in the ...
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1answer
833 views
Hedging long municipal bond portfolio using BMA/SIFMA
A question from one of my members.
Anyone have experience hedging a long municipal bond portfolio using BMA / SIFMA swaps? Anything you can share regarding sizing and structuring the swap and ...
9
votes
2answers
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Can one use options on Treasury futures to hedge a portfolio?
Can one use options on Treasury bond futures to hedge a typical fixed income portfolio? If so, how can one estimate the duration for an option on a Treasury futures contract, and taking this a step ...
3
votes
1answer
229 views
Do bond credit ratings suffer from “ratings inflation”?
A friend of mine who studies game theory suggested that credit ratings from the bond ratings agencies, such as Moody's, S&P, and Fitch, may suffer from a sort of "ratings inflation" similar to the ...
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4answers
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How to get list of all CUSIPS/ISIN?
I want a list of all CUSIPs/ISINs. It would be nice if they were also categorized (e.g. Bonds/Funds etc). Where can I get such a data?
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2answers
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What is the basis risk between cash and futures government bonds?
I am currently working in a team responsible for maintaining a simple risk application for our bond desk and I am interested in knowing how to provide some sort of basic basis risk metric.
Our desk ...
2
votes
1answer
193 views
How to reconstruct a discontinued economic time series such as the Fed's CP rate?
The old 3-Month Commercial Paper Rate (CP3M) on FRED was discontinued in 1997. I would like to reconstruct this series in a reasonable fashion, so I can use it to analyze more recent events.
I was ...
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2answers
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Closed-form formula for approximate maximum duration of a bond?
In teaching myself about bonds, I am writing some software, one piece of which will calculate the maturity of a bond given the yield curve as a function and a requested duration. The tricky part is ...
7
votes
1answer
845 views
What are some simple algorithms for hedging vanilla bonds?
My team will soon be implementing an auto hedger for our bond trading desk which will be integrated tightly with our risk application and I am interested in researching how this may work.
Any advice ...
12
votes
1answer
509 views
Do people use unbounded interest rate models, and what alternatives exist?
A simple interest rate model in discrete time is the autoregressive model,
$$
I_{n+1} = \alpha I_n+w_n
$$
where $\alpha\in [0,1)$ and $w_n\geq 0$ are i.i.d. random variables. When working with ruin ...
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2answers
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Is duration additive? $C_{newDur}=A_{fundDur}w_{a} + B_{fundDur}w_{b}$?
Suppose quantified duration (like Macaulay duration with changing intervals) $Dur = \frac{\sum t_{i} PV_{i}}{\sum PV_{i}}$ and two funds having durations $D_{a}$ and $D_{b}$. You own them in the ...
8
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1answer
867 views
Modified Durations of Different Noncallable Bonds and function of Maturity
I'm hoping someone could help me understand this subject better.
Basically I am reading a book and it shows a table
...
7
votes
2answers
555 views
How do bond pricing formulae differ between the US, UK and the Euro zone?
Let's restrict the scope of the question a little bit: I'm interested to learn about major differences in pricing formulae for nominal government bonds. The pricing formulae for inflation-linked bonds ...
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votes
3answers
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Does the debt load affect the volatility of equity?
Does the debt load of a company have an impact on the stock price of a company and its volatility? Also, how does the market react to the announcement of a company issuing bonds?
