Introduction to fixed income valuation (CFA Level II Suggested Reading
- Principles and methodology of bond valuation
- How the value of a bond changes with the change in discount rate
- How the price of a bond changes as the bond approaches its maturity
- Value of a zero-coupon bond
- Accrued interest, and clean and dirty price of a bond
- The deficiency of the traditional approach to valuation
- The arbitrage-free valuation approach using Treasury spot rates
- Stripping, reconstitution, and arbitrage profit that result when the price of a bond diverges from its arbitrage-free value
Term structure and volatility of interest rates (CFA Level II Suggested Reading
- Shapes of the yield curve and the nature of shifts in the yield
- Factors that drive Treasury returns
- Securities used to construct the theoretical spot rate curve
- Theories of the term structure of interest rates
- Using key rate duration to measure and manage bond portfolio risk
- Historical, implied and forecasted yield volatility
Credit analysis (CFA Level II Suggested Reading
- Types of credit risk
- The four Cs of credit: character, capacity to repay, collateral and covenants
- Key ratios used credit analysis
- High-yield debt and issuer structures
- Using the equity perspective for analyzing high-yield issues
- Credit analysis of asset-backed securities, municipal bonds, and sovereigns
Valuing bonds with embedded options (CFA Level II Suggested Reading
- Constructing binomial interest rate trees
- Valuing binomial interest rate trees with option-free bonds, callable bond and putable bonds
- Decomposing the value of a callable/putable bonds into a straight bond and an option position
- Option-adjusted spread versus nominal spread
- Estimating effective duration and convexity
- Basic features and calculated parameters of a convertible bond
- Option-based valuation of a convertible bond
- Contrasting convertible bond with a common stock position
Valuing mortgage-backed and asset-backed securities (CFA Level II Suggested Reading
- Cash flow yield of MBS and ABS
- Nominal spread, zero-volatility spread, and option adjusted spread
- Monte Carlo simulation model for valuing MBS
- Relative value analysis of MBS
- Effective duration and other duration measures
- Interest rate risk of MBS
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