midterm review - Debt Securities make up the fixedincome...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Debt Securities make up the fixed-income capital market; promise fixed stream of income or stream determined according to a formula. Cpn bonds obligate issuer to make int pymts, coupon payments , over the life of the bond &then repay the par value (face value)@maturity. Price of any financial instrument = PV of the expected CF’s from the instrument. Determining price requires an estimate of expected CFs & approp req’d yield. Yield (min int rate that investors want), y, on any investment is int rate that satisfies (eq) . Price-Yield Rel: inversely related. Premium bonds: cpn rate > yield. Discount bonds: cpn rate < yield. of a bond is greater , the longer the term to maturity. For a given term to maturity and initial yield, the price volatility of a bond is greater, the lower the cpn rate. Measures of bond price volatility: price value of a bp, yield value of a price change, duration. Duration: approx of ratio of proportional /\ in bond P to absolute /\ in yield. Tangent (gives the rate of absolute price changes) is closely related to the duration (rate of % of price /\ s). Steeper the tangent line-> greater duration. Flatter tangent-> lower duration. For small /\ s in yield, tangent line & duration estimate actual price well. The farther away from initial yield y*, the worse the approximation. Accuracy of the approx depends on curvature (convexity ) of the price-yield relnship for the bond. Convexity is the curvature of the price-yield relnship of a bond. Convexity Measure is the quantification of the sensitivity of the duration of a bond to the changes in interest rates. Graph depiction of the
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.
Ask a homework question - tutors are online