December 2020 CFA Level 1: Study Session 15. Fixed Income II - Reading 46. Understanding Fixed-Income Risk and Return

CFA Exams
Dec. 2020 Level 1
Study Session 15. Fixed Income II
Reading 46. Understanding Fixed-Income Risk and Return

Reading 46. Understanding Fixed-Income Risk and Return

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	Reading 46. Understanding Fixed-Income Risk and Return
	1. Sources of Return a. calculate and interpret the sources of return from investing in a fixed-rate bond;
	2. Macaulay, Modified and Effective Durations b. define, calculate, and interpret Macaulay, modified, and effective durations; c. explain why effective duration is the most appropriate measure of interest rate risk for bonds with embedded options; d. define key rate duration and describe the use of key rate durations in measuring the sensitivity of bonds to changes in the shape of the benchmark yield curve;
	3. Properties of Bond Duration e. explain how a bond's maturity, coupon, and yield level affect its interest rate risk;
	4. Bond Portfolio Duration f. calculate the duration of a portfolio and explain the limitations of portfolio duration;
	5. Money Duration of a Bond and the Price Value of a Basis Point g. calculate and interpret the money duration of a bond and price value of a basis point (PVBP);
	6. Bond Convexity h. calculate and interpret approximate convexity and distinguish between approximate and effective convexity; i. estimate the percentage price change of a bond for a specified change in yield, given the bond's approximate duration and convexity;
	7. Interest Rate Risk and the Investment Horizon j. describe how the term structure of yield volatility affects the interest rate risk of a bond; k. describe the relationships among a bond's holding period return, its duration, and the investment horizon;
	8. Credit and Liquidity Risk l. explain how changes in credit spread and liquidity affect yield-to-maturity of a bond and how duration and convexity can be used to estimate the price effect of the changes.