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Terms in this set (13)
Accured Interest for gov't bonds v.s. corporate bonds
Gov't bonds use actual days
Corporate bonds use 30-day months or 360-day year
LTV (Loan-to-Value) ratio
indicates the percentage of the value of the real estate collateral that is loaned
Lower LTV = less risk = better credit quality
Higher debt service coverage ratio = good credit quality
Agency RMBS v.s. Non-Agency RMBS
Agency residential mortgage-backed securities (RMBS) are guaranteed and issued by GNMA, Fannie Mae, or Freddie Mac. Mortgages that back agency RMBS must be conforming loans that meet certain minimum credit quality standards.
Non-agency RMBS are issued by private companies and may be backed by non-conforming mortgages.
Duration is a measure of the sensitivity of the price -- the value of principal -- of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years.
Duration increases when maturity increases
Duration decreases when the coupon rate increases
Duration decreases when YTM increases
Convexity is a measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes.
Convexity is used as a risk-management tool, and helps to measure and manage the amount of market risk to which a portfolio of bonds is exposed.
The possibility that a borrower fails to make the scheduled interest payments or return of principal.
Credit risk is composed of default risk, which is the probability of default, and loss severity, which is the portion of the value of a bond or loan a lender or investor will lose if the borrower defaults. The expected loss is the probability of default multiplied by the loss severity.
the possibility of your bond losing value because it's spread widens... reasons why it widens is because
- credit migration or downgrade risk
- market liquidity risk
Seniority Rankings of Corporate Debt:
Secured debt is a direct claim on specific firm assets and has priority over unsecured debt. Secured or unsecured debt may be further ranked as senior or subordinated. Priority of claims may be summarized as follows:
-First mortgage or first lien.
-Second or subsequent lien.
-Senior secured debt.
-Senior unsecured debt.
-Senior subordinated debt.
-Junior subordinated debt.
Takes into consideration embedded options in the bond
does not consider the effect of embedded options
Arbitrage-free bond valuation
Use of a series of spot interest rates that reflect the current term structure
The use of multiple discount rates will result in more accurate bond pricing and in so doing, will eliminate any meaningful arbitrage opportunities
Partially Amortizing Mortgage v. Rollover v. Hybrid Mortgage
Partially amortizing mortgage includes some amount of principal in each payment but still has an outstanding principal balance at maturity.
A hybrid mortgage becomes an adjustable-rate mortgage after an initial fixed-rate period.
A rollover mortgage changes from one fixed rate to another during its life.
Macaulay duration is the investment horizon at which reinvestment risk and market price risk approximately offset.
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