05 Fixed income

1.Which one is US gov't is backed by full faith of US gov't? 2.Pays int. when? 3.Which ones are from gov't sposnoired agencies? 4Taxes and risk?

1. GINNIE MAE 2. monthly 3.Fanie Mae and freddie mac 3semi annual 4. state and federal prepayment and reinvestment ...jsut l;ike MBS

Which of the following bonds is most affected by interest rate risk? A) 7.6s of '31 yielding 7.2%. B) 7.8s of '27 yielding 7.3%. C) 7.5s of '24 yielding 7.2%. D) 7s of '22 yielding 7%.

7.6s of '31 yielding 7.2%. Interest rate risk is the loss in value due to a rise in interest rates. Since there is little difference in coupon rates, the bond with the longest maturity (highest duration) will experience the greatest fall in a rising interest rate market.

When doing cash flow analysis of MBS, what maturity do you use?

Average maturity

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A)JKL 4s of 2020 B)ABC 5s of 2040 C)GHI 7s of 2042 D)DEF 6s of 2041

B)ABC 5s of 2040 The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Since there is very little difference between maturity dates of 2040 through 2042, the bond with the lowest coupon will have the longest duration. The 4s of 2020 have a relatively short duration, even though their coupon is low.

Calculate the following: Nominal vs Current vs YTM vs YTC

Nominal = coupon(par) / par price Current = coupon(par) / current price YTM = YTC =

TIPS bond 3% coupon with annual inflation of 4% for the next two years. What is the inflation adjusted % and $ ?

Principle .5N = 1,000 x 1.02 =1,020 Principle 1.0N = 1,020 x 1.02 =1,040 Principle 1.5N = 1,040 x 1.02 =1,061 Principle 2N = 1,061 x 1.02 =1,082 Coupon .5 = 1020 x .015 Coupon 1.0 = 1040 x .015 Coupon 1.5 = 1061 x .015 Coupon 2 = 1082 x .015 Answer = 3% inflation adjusted real return = = coupon