The most comprehensive educational resources for finance

Sovereign Debt

Sovereign debt is debt issued by foreign governments. Sovereign debt is unique because analysts and investors will need to evaluate not only the government’s ability to repay (economic risk), but also its willingness to repay (political risk). Because default rates on sovereign debt issued in foreign currency have been higher than sovereign debt issued in

Analyzing Credit of Municipal Bonds

Two general types of municipal bonds (or “munis” as they are commonly called): Tax-backed or general obligation bonds. Revenue bonds. These bond types require their own distinct approaches when performing credit analysis. Tax backed bonds: factors to consider The debt burden of the community.  This is commonly examined in terms of debt per capita, debt

Principles of Credit Analysis

Credit Risk to Investors: Three Types Default Risk: The risk that a borrower fails to make an interest or principal payment on schedule. Credit Spread Risk: The risk that market conditions change in a manner that causes the yield spread of a fixed income security to widen against its benchmark yield. Downgrade Risk: This is

CFA Level 2: Fixed Income Part 1 – Introduction

This tutorial is the first in two parts covering fixed income.  The objective of these sessions is to build on the foundation created in Level 1 in order to establish a competency of valuing more complex fixed income securities beyond basic coupon paying and zero coupon bonds. Given the complexity of some of the material

Dynamic Hedging and Average Life

This lecture reviews the intuition from the previous class, where the idea of dynamic hedging was introduced. We learn why the crucial idea of dynamic hedging is marking to market: even when there are millions of possible scenarios that could come to pass over time, by hedging a little bit each step of the way,

Yield Curve Arbitrage

Where can you find the market rates of interest (or equivalently the zero coupon bond prices) for every maturity? This lecture shows how to infer them from the prices of Treasury bonds of every maturity, first using the method of replication, and again using the principle of duality. Treasury bond prices, or at least Treasury

Quick Approximation of Price Value of a Basis Point (PVBP)

We know that the Price Value of a Basis Point is the change in the value of a bond due to a 1 basis point change in the interest rates. You can use a spreadsheet to calculate the PVBP. However, if you want a quick approximation of the same, you can use your financial calculator,

Basis Point Value (BPV / DV01)

Basis Point Value also known as Delta or DV01 represents the change in the value of an asset due to a 0.01% change in the yield. It is commonly used to measure the interest rate risk in a bond position or a portfolio and can be effectively used while hedging the portfolio. An effective way

Current Yield of a Bond

Current Yield The current yield of a bond measures the returns an investor can expect if he holds the bond for a period of one year. It is calculated as the annual interest received divided by the current price of the bond. Current Yield = Annual Interest / Current Bond Price The current bond price

How to Read Bond Quotes?

In the bond markets, the prices are quotes as a percentage of par. For example, assume that the par value of a bond is $100. If the quoted offer price for the bond is $98.75, this means that the investor will have to pay $98.75 for the bond with $100 nominal value. The bond selling