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Author: Bill Campbell
Valuing Risky Bonds
In this context, a risky bond is one for which there is a nonzero probability of default. Conceptually, valuing such a bond is child’s play: you calculate the (present) value of the bond assuming no default (which the curriculum abbreviates VND: Value, No Default), then subtract the (present) value of the expected credit losses (i.e.,…
Yield Curve Strategies – Dynamic Yield Curve
Making Money with Bonds In the article on yield curve strategies in general, I mentioned the two broad ways to make money with bonds: Coupons (more generally, to incorporate synthetic strategies using, for example, swaps: interest payments) Price changes The curriculum breaks down the expected return on a bond in this manner: \begin{align}E\left(R\right) &≈ Coupon\…
Yield Curve Strategies – Static Yield Curve
Making Money with Bonds In the article on yield curve strategies in general, I mentioned the two broad ways to make money with bonds: Coupons (more generally, to incorporate synthetic strategies using, for example, swaps: interest payments) Price changes The curriculum breaks down the expected return on a bond in this manner: \begin{align}E\left(R\right) &≈ Coupon\…
Dividend Discount Models
A time-honored method to determine the value of an investment is to discount to the present all of the investment’s (expected) future cash flows, and tot up those present values. It’s a method we use commonly when valuing bonds, and when valuing projects in which a company is considering investing (e.g., whether or not to…
Equity Valuation Models
The CFA curriculum discusses a variety of methods for estimating the value of a company’s equity. The approaches, or models, fall broadly into these categories (covered in separate articles; follow the links): Present value models (also known as discounted cash flow models) Dividend discount models (DDMs) Free cash flow to equity (FCFE) models Free cash…
Short Butterfly Spread
If you haven’t read the article on option strategies in general, that’s a good place to start, then return here. In particular, if you haven’t read the warning about calculating profit that appears at the end of that article, you should go read it now; the way I’m calculating the profit here is correct, but…
Short Strangle
If you haven’t read the article on option strategies in general, that’s a good place to start, then return here. In particular, if you haven’t read the warning about calculating profit that appears at the end of that article, you should go read it now; the way I’m calculating the profit here is correct, but…
Inverse (Short) Straddle
If you haven’t read the article on option strategies in general, that’s a good place to start, then return here. In particular, if you haven’t read the warning about calculating profit that appears at the end of that article, you should go read it now; the way I’m calculating the profit here is correct, but…
Yield Curve Strategies – General
In 2019, CFA Institute revised all of their Level III Fixed Income readings, and, in particular, came up with a 10-page blue box example that was absurdly complex, which I simplified here. That example’s gone. Fortunately. (In point of fact, I’m sorry that the idea is gone from the curriculum, because it was interesting and…
Tax Bases
The tax base (it used to be tax basis, but somehow it changed to tax base; I think the reason is that the plural for each word is “bases” (pronounced <base-eez> and <base-ezz>, respectively), that someone mistook “bases” (plural of “basis”) to be “bases” (plural of “base”), and the error caught on) of an asset…