Topic · Core Finance & Asset Classes
← All topicsFixed Income
118 articles · 18 checkpoints · 72 deeper reads · 28 reference notes
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A bond's price is just the present value of the cash it promises. The wrinkle is that the price you see quoted is not the price you pay, because the seller is owed the slice of the next coupon they sat through.
A repo is a short-term loan wearing the clothes of a sale. You hand over bonds, take in cash, and agree to buy the bonds back tomorrow at a slightly higher price. It is the plumbing that funds almost every leveraged bond position in the world.
The single interest rate that makes a bond's promised cash flows worth exactly its price. It is the bond market's universal comparison number, and it quietly assumes things that are almost never true.
How to turn a handful of quoted coupon bonds into a clean rate for every single future date. You solve one maturity at a time, each answer feeding the next, which is why it is called bootstrapping.
Betting that a yield curve steepens or flattens sounds like a single trade, but sizing the two legs by equal dollar notional (cash-neutral) versus equal dollar-value-of-a-basis-point (duration-neutral) produces two very different exposures to parallel rate moves.
A callable bond's cash flows change depending on where rates go, so ordinary duration, which assumes fixed cash flows, gives the wrong answer; effective duration fixes this by re-pricing the bond, option and all, at shifted rates.
A Brazilian government bond denominated in dollars and one denominated in reais can carry wildly different yields for the same issuer, because one asks you to bear only credit risk while the other stacks currency and local rates risk on top.
A bond whose cash flows come from thousands of home loans. Because every homeowner can repay early whenever they like, the investor is short a call option, and that one fact explains almost everything odd about how MBS behave.
Fit a smooth curve through a set of bond yields and the leftovers, the residuals, tell you which individual bonds are trading expensive or cheap relative to their neighbours, which is where curve relative-value trades come from.
A SOFR floating-rate loan does not know its own interest payment until the period is nearly over, because the rate is built by compounding each day's overnight rate after the fact, a genuine mechanical break from how LIBOR loans used to be set in advance.
A yield curve can be quoted three different ways, as spot rates, par yields, or forward rates, and each is a mechanical transformation of the same underlying discount factors, not a different opinion about interest rates.
Why does a ten-year bond yield more than a one-year bill? Either the market expects short rates to rise, or it is paying you to accept the risk of locking money up. Splitting the yield curve into those two pieces is one of the central problems in fixed income.
The US Treasury sells new debt through single-price auctions where every winning bidder pays the same clearing yield, and the gap between that yield and where the bond traded beforehand, the tail, is the market's own scorecard on how the auction went.
An affine term structure model builds the whole yield curve from a small number of underlying factors using a straight-line (affine) formula, which is why models like Vasicek and Nelson-Siegel can price every maturity from just two or three numbers.
Treasury market liquidity does not come from an exchange order book, it comes from dealers willing to warehouse bonds on their own balance sheets, and post-crisis capital rules mean that willingness now shrinks exactly when the market needs it most.
The expectations hypothesis says a steep yield curve should just mean rates are expected to rise, but a steep curve actually predicts positive excess returns on long bonds, evidence of a time-varying risk premium that forward rates only partly reveal.
A yield curve doesn't move as dozens of independent points, almost all of its motion decomposes into three simple shapes, level, slope and curvature, and hedging a rates book against just those three catches most of the risk with far fewer trades.
A Treasury futures contract and its cheapest-to-deliver bond are linked by a cash-and-carry trade, and the return that trade earns, the implied repo rate, tells a trader whether the futures basis is worth buying or selling against actual overnight funding costs.
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