CFM Fixed Income & Credit Analysis Flashcards

What is modified duration used for in fixed income portfolio management?

Answer: Estimating the percentage price change of a bond for a given change in yield

Modified duration approximates the percentage price change in a bond for each 100-basis-point change in yield.

What distinguishes investment-grade from high-yield (speculative-grade) bonds?

Answer: Investment-grade bonds are rated BBB-/Baa3 or higher, reflecting lower default risk

The investment-grade/high-yield distinction is based on credit ratings and reflects the issuer's creditworthiness and probability of default.

What is the option-adjusted spread (OAS) used for in bond analysis?

Answer: Measuring the spread of a bond with embedded options after removing the value of those options

OAS isolates the credit/liquidity spread by stripping out the impact of embedded options such as call or put features.

What does the term 'par value' mean in the context of a bond?

Answer: The face value of the bond, typically $1,000, repaid at maturity

Par value (face value) is the principal amount the issuer promises to repay to bondholders at the bond's maturity date.

What is a leveraged loan in the credit markets?

Answer: A loan extended to companies with significant existing debt or below-investment-grade credit ratings

Leveraged loans are senior secured loans made to highly leveraged or non-investment-grade borrowers, typically used in LBOs or corporate acquisitions.

What is the difference between nominal yield and real yield on a bond?

Answer: Real yield adjusts the nominal yield for expected inflation

Real yield = Nominal yield − Expected inflation, reflecting the actual purchasing power return to the investor.