rsm336

What are the 3 sources of returns investors earn from holding bonds?

1) coupon income

2) return of principal

3) reinvestment income

inverted yield curve

→ short term interest rates are higher than long-term

→ set by banks to combat inflation

credit spread

difference between the YTM of a corp bond and the YTM of a default free government bond

factors that determine credit rating

1) coverage ratios

2) liquidity ratios

3) leverage ratios

4) profitability ratios

5) cash-flow-to-debt ratios

properties of duration (4 rules)

1. duration of a zero-coupon bond is its time to maturity

2. when coupons are lower, duration is higher

3. when term to maturity is higher, duration is higher

4. when YTM is higher, duration is higher

sources of added value (4 sources)

1. interest rate anticipation

2. yield curve strategy

3. sector selection

4. anomaly trading

1) interest rate anticipation

If interest rates are expected to rise → decrease duration

If interest rates are expected to fall → increase duration

2) yield curve strategies

if curve is expected to flatten → buy barbell & sell bullet

if curve is expected to steepen → buy bullet & sell barbell