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FIXED INCOME AND DERIVATIVES
CFA® Program Curriculum 2020 • LEVEL II • VOLUME 5
© CFA Institute. For candidate use only. Not for distribution.
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CONTENTS How to Use the CFA Program Curriculum Background on the CBOK Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program Feedback
v v vi vi viii ix
Fixed Income Study Session 12
Fixed Income (1)
3
Reading 32
The Term Structure and Interest Rate Dynamics Introduction Spot Rates and Forward Rates The Forward Rate Model Yield to Maturity in Relation to Spot Rates and Expected and Realized Returns on Bonds Yield Curve Movement and the Forward Curve Active Bond Portfolio Management The Swap Rate Curve The Swap Rate Curve Why Do Market Participants Use Swap Rates When Valuing Bonds? How Do Market Participants Use the Swap Curve in Valuation? The Swap Spread Spreads as a Price Quotation Convention Traditional Theories of the Term Structure of Interest Rates Local Expectations Theory Liquidity Preference Theory Segmented Markets Theory Preferred Habitat Theory Modern Term Structure Models Equilibrium Term Structure Models Arbitrage-Free Models: The Ho–Lee Model Yield Curve Factor Models A Bond’s Exposure to Yield Curve Movement Factors Affecting the Shape of the Yield Curve The Maturity Structure of Yield Curve Volatilities Managing Yield Curve Risks Summary Practice Problems Solutions
5 6 6 8
indicates an optional segment
16 19 20 24 24 25 26 29 31 33 33 34 35 35 38 38 42 45 45 47 50 51 54 56 67
© CFA Institute. For candidate use only. Not for distribution. ii
Contents
Reading 33
The Arbitrage-Free Valuation Framework Introduction The Meaning of Arbitrage-Free Valuation The Law of One Price Arbitrage Opportunity Implications of Arbitrage-Free Valuation for Fixed-Income Securities Interest Rate Trees and Arbitrage-Free Valuation The Binomial Interest Rate Tree What Is Volatility and How Is It Estimated? Determining the Value of a Bond at a Node Constructing the Binomial Interest Rate Tree Valuing an Option-Free Bond with the Tree Pathwise Valuation Monte Carlo Method Summary Practice Problems Solutions
7