Term structure, credit analysis, bond with embedded options, forward and swap valuation and option pricing.
40 cards · basic cards · AI-written, checked twice. Edit anything.
- Define spot rate
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The interest rate for a single period from today to a specified future date, with no intermediate cash flows- What does the pure expectations hypothesis state about forward rates?
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Forward rates equal expected future spot rates; the yield curve slope reflects market expectations about future interest rate changes- Explain the liquidity preference hypothesis
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Investors demand a liquidity premium for longer-maturity bonds; forward rates are higher than expected future spot rates- What is the market segmentation hypothesis?
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Different investor types prefer specific maturity segments; the yield curve reflects supply and demand imbalances across buckets- How does the bootstrap method derive spot rates?
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Iteratively solve for each spot rate using market prices of coupon-bearing bonds, starting with the shortest maturity- Distinguish between a par curve and a spot curve
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Par curve shows yields for bonds priced at par (coupon equals yield); spot curve shows zero-coupon rates- How does duration relate to the term structure?
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Duration measures weighted average time to cash flow receipt and captures bond price sensitivity to yield changes across the curve- Define forward rate
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The interest rate for a future period, implied by the spot curve for two different maturities- Define credit spread
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The difference in yield between a corporate bond and a risk-free government bond of similar maturity- What is Option-Adjusted Spread (OAS)?
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The parallel yield shift that equates present value of a bond's expected cash flows to its market price, adjusted for embedded options- Explain credit rating migration
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The probability that a bond issuer's credit rating moves to a different level (upgrade or downgrade) over a specific period- Define probability of default (PD) in a forward period
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The likelihood that a bond issuer will fail to make promised payments by a specified future date- What is Loss Given Default (LGD)?
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The percentage of a bond's value lost in default, equal to one minus the recovery rate- Calculate expected credit loss using its components
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Expected Loss equals Probability of Default times Loss Given Default times Exposure at Default- What is a callable bond?
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A bond in which the issuer has the right to repurchase (call) the bond before maturity, typically when interest rates fall
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