Fixed Income Valuation Factors
Chapters in this video
- 0:00 Interest rate risk and the duration-of-7 panic example
- 1:16 Immunization, coupon anchors, and zero-coupon bond traps
- 2:58 Yield to call versus yield to maturity and the discount climbs, premium dips ladder
- 4:25 Convertible bonds, conversion ratio, and forced conversion traps
- 5:41 Credit ratings, fallen angels, and recession spread widening
- 7:06 Discounted cash flow intrinsic value and the buy rule
- 7:46 Rapid-fire exam recap
What this video covers
- How duration quantifies interest rate sensitivity, why portfolio duration is a weighted average, and how immunization matches duration to the investment time horizon
- Why zero-coupon bonds have duration equal to maturity (no interim cash flows), making them the most price-sensitive bonds for a given maturity
- When to use yield to call (YTC) for premium bonds versus yield to maturity (YTM) for discount bonds, and why issuers call premium bonds early
- The yield hierarchy ladder: how discount bonds show climbing yields (nominal, current, YTM, YTC) while premium bonds show dipping yields
- How to calculate conversion ratio using par value ($1,000) divided by conversion price, and why forced conversion happens when call price sits below conversion value
- The investment-grade cutoff at BBB minus (or BAA 3) versus high-yield at BB plus (or BAA 1), what a fallen angel downgrade does to price, and why credit spreads widen during recessions
- How discounted cash flow (DCF) determines intrinsic value, why the required rate of return handles risk (not the credit rating directly), and the buy rule when intrinsic value exceeds market price
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