Term
When do day count conventions matter? |
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Definition
when computing the interest that accrues on a fixed income security. When a bond is purcahsed, the buyer must pay any accured interest earned through the settlement date. |
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Term
How do you calculate accrued interest? |
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Definition
Accrued interest = coupon * (#days from last coupon to the settlement date/#days in coupon period) |
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Term
Describe the commonly used day count conventions and the markets each is typically used in: |
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Definition
1 - actual/actual - used for US Treasury bonds
2 - 30/360 - used for US corporate and municipal bonds
3 - actual/360 - used for US money market instruments |
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Term
Suppose there is a semi-annual-pay bond with a $100 par value.
Coupons are paid on March 1 and September 1 of each year.
Annual coupon = 6%. It is currently July 13.
Computer the accrued interest of this bond as a T-Bond and a US corporate bond. |
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Definition
Accrued interest formula = coupon * (#days from last coupon to the settlement date / #days in coupon period)
T-bond uses actual/actual
US corporate bond uses 30/360
For answer see pay 71 |
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Term
How are T-bond price quoted?
How many dollars is 95-05 equal to? |
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Definition
T-bond prices are quoted relative to a $100 par amount in dollars and 32nds.
95-05 is 95+5/32 = 95.15625 |
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Term
The quoted price of a T-bond is not the same as the cash price that is actually paid to the owner of the bond... what is the cash price equal to? |
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Definition
cash price = quoted price + accrued interest |
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Term
Define dirty price:
Define clean price: |
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Definition
Dirty price = the price that the seller of the bond must be paid. = quoted price + accrued interest.
Clean price = cash price (dirty price) - accrued interest |
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Term
Add a card for AIM 27.2 (p72) |
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Definition
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Term
Describe the US Treasury bond futures contract conversion factor: |
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Definition
The short can deliver ANY government bond with maturity > 15 years.
Since the different bonds have very different market values the CBOT has created conversion factors. The conversion factor defines the price received by the short position of the contract.
cash received = (quoted futures price * conversion factor) + accrued interest.
Why? If the short needed to deliver a specific bond there could be a run on the specific bond required.
WHY? |
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Term
What is the cheapest to deliver bond? |
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Definition
it's the bond that minimises the following equation:
quoted bond price - (quoted futures price * conversion factor) |
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Term
Calculate the final contract price on a eurodollar futures contract? |
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Definition
The eurodollar enables investors to lock in libor rates.
eurodollar futures price = 10,000 [100-(0.25)(100-quoted price)]
quote = 1 - (annualised libor rate)
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Term
Describe and compute the eurodollars futures contract convexity adjustment: |
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Definition
actual forward rate = forward rate implied by futures - (.5 * variation of the change in the rate, i.e. libor * T1 (the maturity) * T2 (maturity + 90 days.
TIP: forward rate should be smaller than futures as as forward doesn't have the daily settlement and thus doesn't have the increased volatility due to the daily settlement |
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Term
What's the objective of a duration based hedge and how do you calculate it? |
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Definition
the objective is to create a combined position that does not change in value when yields change by a small amount.
Number of contracts to hedge = (P * DP) / (F * DF)
P = portfolio hedge horizon value
DP = duration of the portfolio at the hedging horizon
F = futures position contract value
DF = duration of the futures contract |
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Term
Question:
6 month hedging horizon
portfolio value 100,000,000
6 month t-bond contract: 105-09
contract size: 100,000
duration portfolio = 10
duration futures = 12
outline the appropriate hedge for small chagnes in yield |
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Definition
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