Review Sheet
Bond Basics
Exam I
Chapters 1 & 2: bond fundamentals
 Fixed rate bond versus floating rate bonds – page 29
 Bond price – clean and dirty prices -- page 28 (go through the 3-step approach in the
note)
 Accrued interest – page 31
Chapter 3: Yields and Returns
 Yield for a portfolio (page 43-44)
 Yield spread for floating rate securities (page 44-45) – the idea is to assume the
reference to stay constant over the life of the bond. Then compute the yield of
maturity of the bond. The difference between the yield of maturity and the reference
rate is the yield spread.
 Total return – pages 46 – 55
o Three sources of a bond’s dollar returns (page 46)
 The periodic coupon interest payments made by the issuer
 Capital gain
 Interest on interest
o Two types of questions to solve
 Hold the bond until its maturity date (page 47-48)
 Hold the bond before its maturity date (page 51-52)

Interest rate risk/price risk versus Reinvestment risk (page 48)
Chapter 4: Duration and Convexity
 Price value of a basis point – page 63 and 64
 Yield value of a price change – page 64
 Duration
o Macaulay duration – page 65, (4.5); calculations see pages 66 and 67
o Modified duration – page 65, (4.6); modified duration can be also expressed
as (4.8) on page 65
o Approximating the percentage price change and dollar price change
 Formula see (4.11) on page 69 and 70
 Example on pages 69 to 71
 You don’t have to follow the idea of dollar duration there. For dollar
price change, just use the formula: dP=-(modified duration)*P*(dy).
This is the formula above (4.14)
o Portfolio duration – page 72
o Approximating duration – page 84

Convexity
o Understand what is convexity – page 74
o Formula – page 76
o Example – page 77 and 78
o Price change due to convexity – page 79
o Value of convexity – page 81
o Approximating convexity – page 85
Chapter 5: Term Structure
 Yield curve – page 101 and 102
 Different theories to explain yield curve – page 116 through 123
 On-the-run treasury issues – page 104
 Compute theoretical spot rates – page 105 through 108
 Selected off-the-run treasury issues
 Treasury Strips
 Forward rates – page 114 (5.5)
Chapter 6: Treasury and Agency Securities Markets
 TIPS page 129
 Auctions of treasury securities page (135—141)
o Noncompetitive bid versus competitive bid
o Stop-out yield
o Bid-to-cover ratio
o Single price auction
 On-the-run issue; off-the-run issue; wi market
 Price quotes for T-bills -- page 142
 Price quotes for treasury coupon security – page 144 (e.g., 107-222) and AI
 Basics of Federal Agency Securities
o Federally related institutions
o Government-sponsored enterprises
Chapter 7: Corporate Debt
 Basic features for corporate bonds
 Corporate bond ratings (page 162-163)
 High-yield corporate bonds (page 167-169)
 Medium-term Notes
 Commercial Papers
Chapter 8: Municipal Securities
 Tax-backed debt (page 188-189)
o General obligation bonds
o Appropriation-backed obligations
o Debt obligations supported by public credit enhancement programs
 Revenue Bonds (page 189)
 Yields on municipal bonds (page 201)
Chapter 9: Non-U.S. bonds
 Eurodollar bonds
 Pfandbriefe market (page 221)
 Brady bonds (page 222)