9

It's complicated. Assuming there is no CTD switches, then yes, the theoretical modified duration should be unchanged and the DV01 will be lower. For simplicity, imagine that there is only one bond eligible for delivery into the contract. We'll also ignore all the other complications (e.g., variation margins), then the theoretical futures price is simply the ...


5

The price of most (not all) bonds is quoted as a percentage of face value (par). For most amortizing bonds that have already amortized, the percentage is of the face value now, after amortizations, not the initial face value. (Bonds that are quoted / trading dirty / flat / on proceeds are different and I won't go there.) Suppose, for concreteness, than some ...


3

Basically you are right to be skeptical about the use of the yield to maturity as a metric for comparing investments. It is useful, but imperfect, and it is important to understand its limitations. The simplest measure of bond return is the current yield $y_c = c/P$ which is the coupon divided by the price. If there was one coupon left, this might make sense....


3

Let me add that in my experience, floating-rate bonds are less liquid than fixed coupon bonds, particularly in emerging markets and also particularly for corporates. As user42108 pointed out, it might not be possible to borrow the floating rate bond (so that you cannot short the asset swap). Also, if the bid-ask spread on the floating rate bond is large (...


3

Let's start with the "safest" bonds in the world, and work our way down the credit quality curve. In Europe, the safest and virtually "credit-risk free" bonds are the German Bunds. If you look at the 10y yield of the German bunds, these are negative 60 bps as of this morning. The ECB deposit rate is negative 50 bps: from the fact that the ...


3

The strike in these examples is the clean price. If a bond is called, then the bond holder receives the strike plus the accrued interest. It's exactly as if the bond hold sold the bond in the secondary market for clean price = strike. Bonds are frequently issued to be callable at par in the last few months of their lives for convenience: the issuer expects ...


2

This should really be a comment to Dom's excellent answer (or to your question) but I don't have enough reputation to do so. For a textbook treatment that essentially covers the same points as Dom, see Chapters 1-3 of Fixed Income Securities by Tuckman et al (3rd edition). Somewhat unconventionally, the book starts by talking about Spot and Forward rates ...


2

what happens if such probability differs from those implied by CDS spreads? I would imagine there is an arbitrage opportunity there but don’t know what it would look like in practice Bonds vs. CDS is known as 'basis'. If you think it's an arbitrage, I suggest you look at what happened to basis during the GFC. C.f. https://chairegestiondesrisques.hec.ca/wp-...


2

Bond valuation is often assumed to be dependent solely on the 'credit spread'. But the primary driver of securities prices is supply and demand, and this can materialise in many different ways. Let me give you a list and short description of factors that might create specific supply/demand factors over other bonds of potentially perceived identical credit. ...


2

"it depends on whether you can "monetize the spread"" Presumably means whether you can trade the spread and make (or lose) money by doing so. It's possible there are "limits to arbitrage" - most likely no borrow - that prevent trading the spread. Really, the correct answer is to ask your senior...


1

If you're trying to get the jargon right, a "note" is up to 10 years maturity, and a U.S. Treasury "bond" is longer than 10 years. But it's OK, it's not wrong to call everything "bonds". You need to know the market conventions for US treasury securities. You have to know that if they're quoted on price, then it's clean price. ...


1

To add some titles that haven't been mentioned: Interest Rate Swaps and Other Derivatives by Howard Corb. Excellent - and comprehensive - overview from a former rates salesperson at a bulge bracket bank Pricing and Trading Interest Rate Derivatives: A Practical Guide to Swaps by J Hamish M Darbyshire Fixed Income Relative Value Analysis, + Website: A ...


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