11_23_2010 Review for Exam 2

11_23_2010 Review for Exam 2 - FIXED INCOME SECURITIES...

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1 NAME OF INITIATIVE OR GROUP FIXED INCOME SECURITIES Fall 2010 – FNCE 235/725 Prof. Stephan Dieckmann NOVEMBER 23, 2010 REVIEW FOR EXAM 2
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2 Chapters 13 - 16 • Properties of the short term rate • What is a term structure model? • The Vasicek model • Implications for short-term bonds and long-term bonds • Risk premium • Potential shifts with Vasicek model • Delta and gamma risk management • No-arbitrage versus equilibrium models • Difference between Vasicek and BDT
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3 Past Exam Questions TRUE FALSE • The Vasicek model with a positive risk premium implies that the zero coupon yield curve is always upward sloping. • In the Vasicek model, the long-term bonds earn higher returns on average than short term bonds, as long as the risk premium as positive. • If the interest rate at the current note is lower than the long-run mean interest rate (mu) then the probability of reaching the next “up” node on the Vasicek tree is greater than the probability of reaching the next “down” node. • Parameter φ determines how quickly the short term forecast of the short term rate converges to the long term mean of the short term rate. Faster convergence is consistent with a lower φ . • Equilibrium models, in comparison to no-arbitrage models, are designed to be exactly consistent with today’s observed term structure. In fact, in an equilibrium model today’s term structure is an input to the model.
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4 Chapters 18 - 20 • Option terminology • Put call parity • American versus European • Bond options in the binomial tree • Dynamic replication • Principal for valuation of American Option
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5 Question 2, Exam 2007 …
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6 Question 2, Exam 2007 … Consider two bonds. Bond A is a zero coupon bond with a face value of $108.4212; Bond A matures on year 3. Bond B is a zero coupon bond with a face value of $100.0000; Bond B matures on year 2.
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This note was uploaded on 03/27/2012 for the course FNCE 235 taught by Professor Roussanov during the Spring '09 term at UPenn.

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11_23_2010 Review for Exam 2 - FIXED INCOME SECURITIES...

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