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14 Cards in this Set
- Front
- Back
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coupon rate
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answer = Annual coupon / par value
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current yield
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answer = annual coupon / bond price
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price of a bond
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found by adding together the present value of the bond's coupon payments and the present value of the bond's face value. we calculate this on the calc using N(times 2), I/Y(divided by 2), PMT(divided by 2), FV and PV
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yield to maturity (YTM)
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discount rate that equates the today's bond price with the present value of the future cash flows of the bond
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clean price/flat price
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a quoted price net of (ignoring) accrued interest
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dirty price/full price/invoice price
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the price the buyer actually pays. clean price + accrued interest
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callable bond
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gives the issuer the option to buy back the bond at a specified call price anytime AFTER an intitial call protection period
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duration/Macaulay duration
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concept that helps bondholders measure the sensitivity of a bond price to change in bond yields
% change in bond price = ( - Duration) * ( (changes in YTM) / ( 1 + YTM/2 ) ) duration in a zero-coupon bond = maturity duration in a coupon bond = weighted average of individual maturities of all the bond's separate cash flows, where weights are proportionate to the present value of each cash flow |
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modified duration
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variation of Macaulay's duration.
% change = Macaulay duration / (1 + YTM/2) % change in bond price = ( - modified duration ) * change in YTM |
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duration properties
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all else the same, longer a bond's maturity the longer its duration
all else the same, a bond's duration increases at a decreasing rate as maturity lengthens all else the same, the higher a bond's coupon the shorter its duration all else the same, a higher YTM implies a shorter duration and vice versa |
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bond risk measures based on duration
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dollar value of an 01 (basis point) = ( - modified duration * bond price * 0.01 )
yield value of a 32nd = ( 1 / ( 32 * dollar value of an 01) ) |
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Reinvestment rate risk
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uncertainty about the value of the portfolio on the target date. stems from the need to reinvest bond coupons at yields not known in advance
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price risk
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risk that bond prices will decrease. arises in dedicated portfolios when the target date value of a bond is not known with certainty
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immunization
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term for constructing a dedicated portfolio such that the uncertainty surrounding the target date value is minimized. essentially cancelling out price risk and reinvestment rate risk
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