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Key Concepts File

Week 13 – Bonds

Bond yield spreads – understand the characteristics that
generate spreads
Bond coupon rate
Credit Risk
Interest rate risk
An increase in inflation rate will generally cause an increase in interest
rates to rise
Current yield
Yield to maturity (YTM)
Basic Bond Valuation equation as learned in F301
Zero coupon bonds – always sold at a discount
Default risk premiums
Callable bonds
Convertible bonds
Breakeven time – convertible bond
Conversion value – convertible bond
Conversion premium – convertible bond
Treasury Inflation-Protected Securities (TIPS)
Mortgage securitization process
Financial ratios that are important in bond credit analysis
Cornerstones of bond analysis – character, capacity, collateral and conditions
(4 C’s)
Macaulay Duration
Modified Duration
Convexity – The sensitivity of modified duration to changes in yield to
Maturity and duration display a direct relationship
Coupon rate and duration display an inverse relationship
The annualized total return of the S&P 500 (large-cap stocks) from December
31, 2000, to December 31, 2010, was 1.41%.
Even though bonds are less riskier than stocks, very high–quality bonds,
as represented by the Barclays U.S. Aggregate index, provided a HIGHER
annualized total return over that same time frame.

Week 14 – EMH, MFs and ETFs

ETFs are listed on an exchange and trade just like an
individual stock
Advantages that mutual funds offer individual investors
Investors in well diversified equity index funds significantly avoid unsystematic
Unsystematic risk is higher with sector funds than with diversified equity
index funds
Explain why a managed S&P Index fund is least likely to outperform the
actual S&P 500 Index
Emerging market funds usually have volatility that is higher than U.S. market
S&P 500 Index funds have some benefit of international diversification due
to globalization
Advantages of stock index funds compared to actively managed non-index funds
In assessing mutual fund performance, consider fund performance over past five
to ten years (GIPS)
Total value of a fund (portfolio)

Week 15 – Futures

Futures contract – definition
Derivatives – value based on
Methods for terminating most futures contracts
Most frequently used methodfor terminating a futures contracts
Calculate the gain or loss on a futures contract

Week 16 – Options

A call option – in the money; out of the money
A put option – in the money; out of the money
American option
Time value of an option
European option

More to explorer


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