Fixed Income Exam Essays Review

These flashcards cover key terms and concepts related to fixed income, including theories on interest rates, bond valuation methods, and risk management techniques.

Expectations Hypothesis

A theory stating that long-term bond yields reflect expected future short-term interest rates, assuming bonds of different maturities are perfect substitutes.

Liquidity Preference Hypothesis

A theory that extends the Expectations Hypothesis by stating that investors prefer liquidity, thus requiring a liquidity premium for holding longer-term bonds.

Yield Curve

A graph that plots interest rates of bonds with different maturities, indicating investor expectations of future interest rates.

Macaulay Duration

The weighted average time to receipt of cash flows, weighted by the present value of each payment.

Bond Immunisation

A strategy to construct a bond portfolio sufficient to meet future liabilities regardless of small changes in interest rates.

Yield to Maturity (YTM)

The internal rate of return on a bond assuming it is held until maturity, with all coupon payments reinvested at the same rate.

Inverse Relationship

The concept that as interest rates rise, bond prices fall, and as interest rates fall, bond prices rise.

Logistic Regression

A statistical method preferred for estimating default probabilities, which constrains predicted probabilities within the 0 to 1 range.

Default Probability

The likelihood that a borrower will fail to meet its debt obligations over a specific time horizon.

Liquidity Premium

The additional yield that investors require for holding less liquid, longer-term securities.