CFA Level I · Cheat Sheet
| Feature | Definition | ||
| Par Value | Principal amount ($1,000 typical); repaid at maturity | ||
|---|---|---|---|
| Coupon Rate | Annual % of par paid periodically to bondholder | ||
| Indenture | Legal contract; specifies covenants, terms, repayment | ||
| Covenants | Affirmative (issuer must act) or Negative (issuer must refrain) | ||
| Type | Coupon | Price Behavior | Key Feature |
| Fixed-Rate | Constant | Falls when rates ↑ | Simple, predictable |
| Floating-Rate Note (FRN) | Reference rate + spread; resets | Stays ≈ par | Low interest rate risk |
| Zero-Coupon | None; issued at discount | Highest sensitivity | Price = FV / (1+r)^n |
| Callable | Fixed | Capped upside when rates ↓ | Issuer calls when rates fall; ↓ price vs non-callable |
| Putable | Fixed | Price floor when rates ↑ | Bondholder can sell back; protects on rate ↑ |
| Convertible | Fixed | Equity-like upside | Converts to issuer's shares |
| Segment | Issuer | Key Feature | Yield Vs. Treasury |
| Government | National gov't (Treasury, Gilts, Bunds) | Credit risk–free (local currency) | Benchmark; no spread |
| Corporate | Corporations | Credit risk; affected by ratings | Spread = default risk + recovery |
| Municipal (Muni) | State/local gov't | Tax-exempt interest (federal + often state) | Lower pre-tax yield; high after-tax yield for rich investors |
| Agency | Fannie Mae, Freddie Mac | Implicit gov't backing | Very low spread |
| Securitized | Mortgage/asset pools | Prepayment risk | Spread for credit + liquidity risk |
| Measure | Formula | Use | |
| YTM (Yield to Maturity) | IRR of all cash flows; single discount rate | Primary pricing metric for bonds | |
| BEY (Bond Equiv. Yield) | 2 × (semiannual YTM) | Standard U.S. bond quoting | |
| EAY (Effective Annual Yield) | (1 + YTM/2)² – 1 | Accounts for compounding; comparable across products | |
| Spot Rate (S_t) | YTM of zero-coupon bond maturity t | Building block for valuation | |
| Forward Rate (f) | (1 + S₂)² = (1 + S₁) × (1 + ₁f₁) | Expected future short rate + risk premium | |
| Shape | Meaning | Historical Signal | |
| Normal (↗) | Long rates > short rates | Economic growth ahead; risk premium for duration | |
| Inverted (↘) | Short rates > long rates | Recession likely; falling rate expectations | |
| Flat | Similar across maturities | Economic transition; uncertainty | |
| Theory | Assumption | Implication | |
| Pure Expectations | No maturity risk premium | Curve shape = market's rate expectations only | |
| Liquidity Preference | Adds liquidity premium to longer bonds | Curve typically upward-sloping even if rates expected flat | |
| Market Segmentation | Investors stick to preferred maturity | Supply/demand in each segment determines shape | |
| Trap | Reality | ||
| Callable bonds always have higher yield | TRUE—issuer option costly to bondholder; compensated by ↑ yield | ||
| FRN price stays exactly at par | FALSE—price ≈ par if spread is credit-fair; adjusts if credit changes | ||
| Muni bonds always best for high earners | FALSE—true only if after-tax yield > comparable taxable bond | ||
| Inverted curve = instant recession | FALSE—signals recession risk, but lag of 6–18 months common | ||
| Spot rate = YTM for coupon bond | FALSE—YTM reflects blend of spot rates; different for coupons vs. zeros |
Aligned to the CFA Institute Level I curriculum.
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