Fixed Income Evaluation

Yield to Maturity

The market discount rate appropriate for discounting a bonds cash flows

Constant Yield Price Trajectory

The convergence to par value at maturity

Matrix Price

Method of estimating the required yield to maturity of bonds that are currently not traded or infrequently traded. The procedure is to use the YTMs of traded bonds that have credit quality very close to that of nontraded bonds

Effective Yield

Depends on how many coupon payments are made each year and is simply the compound return

Periodicity

How frequently coupon payments are made

True Yield

The yield calculated using these actual coupon payment dates

Street Convention

Bond yields calculated using the stated coupon payment dates

Current Yield (Formula)

Simple Yield

Takes a discount or premium into account by assuming that any discount or premium declines evenly over the remaining years to maturity

Yield to Call

...

Spot Rates

Market discount payments for a single payment to be received in the future

Bond Equivalent Yield =

((Par/Discount)-1)x(365/Days until Maturity)

Yield Spread

difference between the yields of two different bonds

benchmark spred

yield spread realative to a benchmark bond

G-Spread

A yield spread over a government bond

Interpolated Spread

Yield Spreads relative to swap rates

Zero Volatility Spread

The amount which, when added to the benchmark spot rates, produces a value equal to the market price of the bond

Option Adjusted spread

Takes the option yield component out of the z measure. The OAS is the spread to the government spot rate curve that the bond would have if it were option free

Matrix Pricing (Formula)

If the average of the bond years isnt the years of the non trading bond you are trying to match then:
Shorter time period bond + (((Shorter bond years-Non traded Bond Years)/(Longer Bond Years-Non Traded Bond Years) x (Longer Bond Yield-Shorter Bond Yield

Quoted Margin

Margin used to calculate the bond coupon Payments

Required Margin

Margin required to return the Floating Rate Note to its par value

How does credit quality effect Quoted and Required Margins

If Credit quality decreases then:
Quoted Margin < Required Margin
If credit Quality increases then:
Quoted Margin > Required Margin

Forward Rates

Yields for future Periods

No Arbitrage Price

Price calculated using spot rates because if the bond is priced differently there is an arbitrage opportunity.

Relationship Between Short Term Forward Rates and Spot Rates (Formula)

(1+S?)�=(1+S?)(1+1y1y)(1+2y1y)
where Si is the current spot rate for i periods and 1y1y is the rate for a 1 year loan one year from now and 2y1y is a 2 year loan one year from now

Forward Rates given Spot Rates (Formula)

(1+S?)�=(1+S?)(1+1y1y)
where Si is the current spot rate for i periods and 1y1y is the rate for a 1 year loan one year from now

Flat Price

Quoted Price of the Bond

Option Adjusted yield

Yield of the bond if it were option free

Arbitrage free bond valuation approach

The use of discount rates (Spot Rates) to get more accurate bond pricing and in doing so eliminate any meaningful arbitrage opportunities.

Yield to worst

Lowest of all possible yields to call