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  #341  
Old 01-19-2020, 04:14 PM
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How come it's not listed in the text references? Is it supposed to be part of the 2020 study kit?

Link to where to buy it?

Thanks
https://www.amazon.com/Investments-S...dp/1259277178/

The "complete online text references" link only includes stuff you can download from the CAS for free. Study kit materials and full textbooks are not included.
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  #342  
Old 01-21-2020, 10:48 AM
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How come it's not listed in the text references? Is it supposed to be part of the 2020 study kit?

Link to where to buy it?

Thanks
If you do a thorough google search, you can buy it for $0
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  #343  
Old 01-22-2020, 02:10 AM
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Just about to hit the IRR topics but I can't get over how accessible the source is for this exam. Found almost every paper so far to be well-written and understandable. Haven't done many problems, but using CC as a complement to the source seems to flow really well.

Still having some issues with BKM, mainly with understanding the terminology and the various aspects of bonds. I'm hoping it'll click at some point, but sometimes I feel like I'm just regurgitating my flashcards on yield related topics.
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  #344  
Old 01-22-2020, 08:40 AM
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Originally Posted by DamSon View Post
Just about to hit the IRR topics but I can't get over how accessible the source is for this exam. Found almost every paper so far to be well-written and understandable. Haven't done many problems, but using CC as a complement to the source seems to flow really well.

Still having some issues with BKM, mainly with understanding the terminology and the various aspects of bonds. I'm hoping it'll click at some point, but sometimes I feel like I'm just regurgitating my flashcards on yield related topics.
What bond questions do you have? I think we can all benefit discussing bonds.
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  #345  
Old 01-22-2020, 10:37 AM
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What bond questions do you have? I think we can all benefit discussing bonds.
These might be really dumb but hereís a couple to start:

1) If weíre long on a bond, and we expect interest rates to decrease, Iím not sure I understand why we would short futures contracts to hedge the portfolio since the futures price would decrease if rates fell. It just seems counterintuitive since youíre making your total payoff lower by doing so in that scenario.

2) How do forward rates and short rates relate the yield curve intuitively? Yield is a concept I struggle with because I feel like itís used synonymously with interest and other related terms in some cases but not always..

3) Under liquidity preference theory, they state bond issuers would be more willing to issue long term bonds, which I donít get if buyers prefer short term bonds. How does issuing long term contribute to positive liquidity premium, but having primarily short-term buyers also means positive liquidity premium?
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  #346  
Old 01-22-2020, 11:52 AM
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2) The yield stuff is confusing. Forward rates are expected future short rates. While short rates presumably are true rates that have occurred. Terms are used interchangeably. I forget which yield curve is which (haven't reviewing section A yet). The pure yield curve versus the run yield curve. One is YTM refers to spot rates based on the zero coupon bonds (I believe this is the pure yield curve).

3) I understand liquidity preference theory is that buyers want short term bonds. In order to get them to buy long term bonds you need to entice them by giving them a little extra interest for the illiquidity. I think if you do examples this is clear.

Usually they say based on expectation hypothesis what is the forward rate, based on liquidity theory what is the forward rate. For liquidity theory, you would subtract out the liquidity premium from the implied forward rate.
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  #347  
Old 01-22-2020, 12:02 PM
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I am definitely hazy for stuff like (1). I actually failed because of the bond stuff (forward rate and mortgage question demolished me as did the convexity question).

1) I think you might have this backwards. I will start from your example.

I was under the impression that if I had bought bonds. Then if interest rates decrease the cost of the same bond increases, but I am locked into my bond. For example let's say a ten year bond cost 800 dollars based on old interest rates. If I pay 800 dollars for it and interest rates decrease the bond is now worth 850 dollars based on new interest rates. Another way to look at it is the issuer is paying you 5% when they could be paying you 4% for the coupons. So in this scenario you are benefiting. I think this is your question.

I would assume if you long a bond you are worried about the opposite happening that interest rates increase. Which mean both your bond is overpriced and you are locked into a lower rate. To hedge for this you can short futures. Sell futures so if interest rates due increase you would be making up the difference.

Again pretty hazy with this stuff. Definitely could be wrong.
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  #348  
Old 01-22-2020, 12:09 PM
Rojo Habanero Rojo Habanero is offline
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Well, here are my possibly wrong thoughts:

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Originally Posted by DamSon View Post
These might be really dumb but here’s a couple to start:

1) If we’re long on a bond, and we expect interest rates to decrease, I’m not sure I understand why we would short futures contracts to hedge the portfolio since the futures price would decrease if rates fell. It just seems counterintuitive since you’re making your total payoff lower by doing so in that scenario.



But if you short a future today, you would lock in the price at today's rate right? Essentially then what you are longing and what you are shorting should always move in sync, right?

My understanding is that the situation refers to the fact that you think the interest rate will decrease, but the general market does not. So the future is still priced as if the rates will not decrease.

Edit: To follow Act123's example, if you long the bond for $800, and short a future for $800, you are "immunized". After one year, while the bond increased to $850 (so you made $50), the future also increased to $850 (you lost $50 on the short). So you are hedged.



2) How do forward rates and short rates relate the yield curve intuitively? Yield is a concept I struggle with because I feel like it’s used synonymously with interest and other related terms in some cases but not always..

I think I've always thought of it as F=E[S], so forward rate is the expected value of the short rate? It's a bit murky for me as well but that's how I understand it. So at beginning of year 1, if we expect the yield for a 1 year bond at the beginning of year 2 is 5%, then this is the forward rate.

Now I guess at the end of year 1(or beginning of year 2), the yield for 1 year bond is 7%, this would have been the short rate that was referred to at beginning of year 1. Short rate is the actual rate in the future, forward rate is the expected rate in the future.

(if you have TIA) That's how I understood what Angelo meant when he said "If market is dominated by long term buyers, your forward rate should be less than expected short rate." Because the expected short rate essentially is short term, so it needs to be higher because buyer prefers long term. Whereas the forward rate would be considered long term today, so it does not need to have a liquidity premium. <---- I might be really wrong at this... please correct me if I am wrong.




3) Under liquidity preference theory, they state bond issuers would be more willing to issue long term bonds, which I don’t get if buyers prefer short term bonds. How does issuing long term contribute to positive liquidity premium, but having primarily short-term buyers also means positive liquidity premium?

I don't recall reading this. But I guess if the bond issuers (and buyer) value short term money more, then it would be normal for bond issuers to be more willing to issue long term bonds because they "value it less". Especially if they could get away with issuing it without liquidity premium.

A bad analogy would be if a car rental company has a hybrid Toyota Highlander and a regular Highlander to be rented at the same price, then the company would be more willing to rent out the regular car if it knows the society values the hybrid more.



Last edited by Rojo Habanero; 01-22-2020 at 12:20 PM..
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  #349  
Old 01-22-2020, 07:41 PM
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Originally Posted by act_123 View Post
2) The yield stuff is confusing. Forward rates are expected future short rates. While short rates presumably are true rates that have occurred. Terms are used interchangeably. I forget which yield curve is which (haven't reviewing section A yet). The pure yield curve versus the run yield curve. One is YTM refers to spot rates based on the zero coupon bonds (I believe this is the pure yield curve).

3) I understand liquidity preference theory is that buyers want short term bonds. In order to get them to buy long term bonds you need to entice them by giving them a little extra interest for the illiquidity. I think if you do examples this is clear.

Usually they say based on expectation hypothesis what is the forward rate, based on liquidity theory what is the forward rate. For liquidity theory, you would subtract out the liquidity premium from the implied forward rate.
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Originally Posted by Rojo Habanero View Post
Now I guess at the end of year 1(or beginning of year 2), the yield for 1 year bond is 7%, this would have been the short rate that was referred to at beginning of year 1. Short rate is the actual rate in the future, forward rate is the expected rate in the future.

Interesting, I thought today's short rate is known (rate for time 0 to time 1), but future short rates are uncertain and can only be estimated. I thought by this logic the short rate would be the expected rate in the future while the forward rate is the actual rate in the future 'today'. Based on both your comments, I think I have the wrong interpretation of short rate.

The point about the pure yield curve helps a lot actually as I completely forgot about the distinction. Do you think we should always be assuming a pure yield curve if 'yield curve' is mentioned?

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Originally Posted by act_123 View Post
I would assume if you long a bond you are worried about the opposite happening that interest rates increase. Which mean both your bond is overpriced and you are locked into a lower rate. To hedge for this you can short futures. Sell futures so if interest rates due increase you would be making up the difference.
This actually makes a lot of sense to me, thanks!


Quote:
Originally Posted by Rojo Habanero View Post
I don't recall reading this. But I guess if the bond issuers (and buyer) value short term money more, then it would be normal for bond issuers to be more willing to issue long term bonds because they "value it less". Especially if they could get away with issuing it without liquidity premium.
I believe it's from one of the concept checks in Chapter 16. I just don't understand why a seller prefers long-term bonds at a higher rate (since liquidity is included) because wouldn't they be making interest payments to the buyer? Why would they willingly want to make higher payments over a longer period of time? The short-term part makes sense because I guess investors don't want to deal with liquidity premium (volatility?) associated with the long-term investments.
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  #350  
Old 01-22-2020, 08:15 PM
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I think a seller is willing to pay the liquidity premium because otherwise investors won't buy the bonds... The reason why they are selling the bonds is because they need the funds for their businesses or corporations or government.
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Last edited by act_123; 01-22-2020 at 08:19 PM..
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