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Unformatted text preview: 1 School of Administrative Studies Faculty of Liberal Arts and Professional Studies York University AP/ADMS4504 Fixed Income Securities and Risk Management Fall 2010 Midterm Exam Formula Sheet Coupon = coupon rate par value The coupon formula for a floating-rate security is: coupon rate = reference rate + quoted margin The coupon formula for an inverse floater (or reverse floater) is: coupon rate = K L (reference rate), where K and L are values specified in the prospectus for the issue Price of callable bond = price of option free bond price of embedded call option Price of putable bond = price of option free bond + price of embedded put option The inflation-adjusted principal of Treasury inflation protection securities (TIPS) at the end of the first six-month period is: original par value (1 + the semiannual inflation rate) 1 + real rate = rate inflation 1 rate nominal 1 + + The monthly mortgage payment is calculated as: + = n- r) (1- 1 r B MP , where MP = monthly mortgage payment, B = amount borrowed (i.e., original mortgage loan balance), r = monthly mortgage rate (annual rate divided by 12), and n = number of months of the mortgage loan rate) tax marginal (1 yield exempt tax yield equivalent Taxable rate) tax marginal- (1 yield pretax yield After tax = = 2 bond reference on the yield X bond on yield ratio Yield bond reference on the yield bond reference on the yield- X bond on yield spread yield Relative bond reference on the yield- X bond on yield spread yield Absolute = = = The traditional approach to bond valuation: price of a bond = PV (coupons) + PV (face value) =...
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