Sample interview questions: How do you assess the yield and duration of fixed income securities?
Sample answer:
Assessing Yield
- Current Yield: Calculated as annual coupon payment divided by current market price, represents the current income generated by the security.
- Yield to Maturity (YTM): The annualized rate of return an investor expects to receive if they hold the security until maturity, accounting for both coupon payments and change in market value.
- Yield to Call: The annualized rate of return an investor expects to receive if the security is called before maturity, considering potential call premiums.
- Yield to Worst: The lowest yield an investor can expect to receive under various scenarios, including call, maturity, and default.
Assessing Duration
- Macaulay Duration: The weighted average of the time each coupon payment is received, accounting for both time and amount, and provides a measure of interest rate risk.
- Modified Duration: The Macaulay duration adjusted for interest rate changes, and measures the sensitivity of a security’s price to a change in interest rates.
- Effective Duration: The duration that considers the present value weighting of coupon payments and assumes reinvestment at a specific rate of return.
- Cashflow Duration: The duration that reflects the time-weighte… Read full answer
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