Bond Trading Questions
Hey guys - had some pretty basic bond trading questions for someone working on a corporate credit trading desk (HY or IG).
- What is the price you see on a bloomberg screen - is it the clean or dirty price? And is there some adjustment that needs to be be made to that for the actual price that you transact at?
- What are the differences between bullet and callable bonds that have similar maturities, issued by the same co etc. Is the bullet bond usually priced lower or have a lower coupon? Any other major differences?
- What do I need to know about the ETF create/ redeem process? How does that affect bond trading in reality?
- What do you use DV01 for on a desk? Is it tracked to see potential risk, or something else?
- How does convexity come into your thinking as a trader (if at all)?
Quotes on screens in US are clean, in reality it doesn’t matter as you still make or lose that same in bps or dollars of par (depending if you are trading IG or other)
Bullet bonds are call protected
Vanilla bonds have no call written into them but also no call protection
Callable bonds have a call option written into them
Given that for a callable bond, the issuer sells the bond and buys a call option with the right but not the obligation to buy bonds at a set strike price. Just like any call option, the buyer of a call will profit if the price of the underlying asset rises above the strike price.
ETF creation redemption process isn’t important. All you need to know is what large accounts are buying/selling for those ETFs, what strategies the ETFs are, and when they typically do that rebalancing
DV01 is used to measure interest rate risk and your interest rate hedges will be DV01 weighted if you are trading corporate bonds.
Convexity isn’t really relevant for traders as they think more in carry, am I earning the coupon or am I paying it.
Thank you!
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