Entry 6 - Fixed Income: Technical components explained and don’t discount the wordy section

Hello CFA lovers,

I think from where we left off, I’ve since not been through much new material, but have been through some of the earlier fixed income material with the 7city tutor faculty and realised a coupe of important conceptual points.

Reading 64: Introduction to the Valuation of Debt Securities

There was an interesting portal question that concerned ending wealth as opposed to pricing a bond. I now see how this had to be viewed a little differently from ‘lets plug in an I/Y, FV, N and PMT and press CPT PV’. End wealth is what you get at par plus an annuity of coupons + Interest on Coupons.

Reading 65: Yield Measures, Spot Rates, and Forward Rates

I think spot and forward rates is a tricky concept. I found it essential to draw a time line of when say 8% is being achieved and when 9% is being achieved. That helps you to see intuitively what the forward rate might have to be to bring the geometric average up.

Another interesting concept thrown up by the portal questions was how the realised compound yield might be adjusted. This can be better seen by categorising the bond into:

1. Coupons received
2. Ability to reinvest coupons at the YTM
3. Assurance of making a capita gain/loss

In the particular question YTM was 12% but then interest payments would only be invested at 10%. So one of the 3 components above came under threat meaning the realised compound yield would only adjust downwards by a small amount.

Calculating the yield of a zero coupon bond as a HPR was a helpful skill explained and how the HPR formula is broken down into End/Start – Start/Start

In terms of new questions attempted I went quite quickly through Study Session 15, which is the wordy section of fixed income. I think this is game for quite a few questions in the exam but I decided to go straight into the portal questions:

Reading 60: Features of Debt Securities – 100%

This is quite intuitive following the technical coverage in SS16. Only query was that trading at full = dirty price.

Reading 61: Risks Associated with Investing in Bonds – 100%

There are a lot of different risks but pretty intuitive here.

Reading 62: Overview of Bond Sectors and Instruments – 62%

This was a good wake-up call and a reason to go back into the textbook. There are a lot of different types of instruments and knowing the subtle differences between them requires some reading greatly aided by logical explanations and example from the 7city classroom recordings.

Reading 63: Understanding Yield Spreads – 90%

This again is quite intuitive and helpful if you’ve studies economics and can remember the differences between TSIRs.

As a big picture update, I feel I’m a little behind where I need to be with 5th June in mind. I had earmarked an extended Easter break to dedicate a lot of study time to, however I got landed with a particularly large work project and deadline that unfortunately had to take priority. I managed to finished the fixed income questions and do an FR&A workshop that I’d somehow missed, which was good.

By the end of the weekend 17th / 18th April I’d have like to have completed the Alternatives, Corporate finance, all associated hurdle tests and workshops and having completed the Progress test. (The progress test is a 2 hour Mock exam set by 7city on the first 3 (out of 5) phases of material).

A next longer term goal is to have completed all study sessions questions, etc. by the end of April, which would leave the month of May to do Mock exams and more questions from the CFAI Assigned Readings.