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Is there anything specific you want to know, as the question is quite broad…the CFAI has a whole book on fixed income!
The key is to remember that the bond usually has an initial coupon rate at the outset, but will then be priced based on the differential between the coupon rate (and when the coupon is paid) and the prevailing market rates at that time. This differential is then priced in by way of a premium or discount to the face value.
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Well typically a Level I question would give you a bunch of values, such as required rate of return, PV, FV, coupon, period, etc, and the question would involve you using the BA II Plus to figure out the missing value from the equation.
E.g. Rate of return 10%, 5 years, FV = $1,000, rate of return = 3%…and figure out PV.
Now going through bonds over the weekend I get fixed rate and zero-coupon calculations. But what if the bond is a floating rate bond?
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Not that I’m any less confused, but my understanding is that you’ll have to look up the equivalent LIBOR rates for the period that your bond is valid for, and slowly calculate on a semi-annual basis what the prices would be, starting from date of expiry, and backing up 6 months at a time back to present time.
Or there might be a more efficient way.
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A floating rate bond is less straightforward. From memory, you’ll have to piece together the equivalent risk free rate for the relavant period, i.e. if it’s a 5 year floating rate bond, you should look at the US Treasury bond rates and break the floating rate bond into a series of equivalent fixed rate bonds.
Having said that I’m not sure if floating rate bond pricing is included in Level I. Your prep study notes should state this.
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Thanks @christine!
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