Chapter 6 - Chapter 6 Yield Measures, Spot Rates and...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 6 – Yield Measures, Spot Rates and Forward Rates 1. Sources of return from investing in a bond 1. Coupon interest payments 2. Capital gain or loss: when a security is sold, matures or called 3. Income from reinvestment of cash flows 2. Computation of traditional yield measures: 1. Current yield = annual dollar coupon interest/price 1. Current yield = $7/$94.17 = 7.43% (coupon=7% and bond price = $94.17) 2. Yield to maturity: is the interest rate that will make the PV of a bond’s cash flow equal to its market price + accrued interest. 1. Practice: determine the ytm of a 6% 15yr bond selling for $84.25 (is it 7.2%, 7.6% or 7.8%) 2. Relationship between price, coupon rate, current yield and ytm 1. Par: cr = cy = ytm 2. Discount: cr < cy < ytm 3. Premium: cr > cy > ytm 3. Cash flow yield: For an assumed prepayment rate speed, cash flows can be calculated for an ABS or an MBS. Cash flow yield is the interest rate that will make PV of a bond’s cash flow equal to its market price + accrued interest. 1. (limitations of this type is the uncertainty in the nature of the cash flows for MBS and ABS) 4. Assumptions of the traditional yield measures: that coupon payments can be reinvested
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/06/2010 for the course ECON Econ taught by Professor Liasa during the Spring '10 term at University of San Francisco.

Page1 / 3

Chapter 6 - Chapter 6 Yield Measures, Spot Rates and...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online