Topic 7 - Topic7:Bonds Bondsyield,couponandpricing theories...

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Topic 7: Bonds Bond’s yield, coupon and pricing Yield curve and term structure  theories Duration and Modified duration Convexity
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Yield Curve US treasuries are used as a benchmark for  computing yields on risky bonds For a given maturity, a risk premium is added  to the corresponding maturity Treasury  security to arrive at the yield for a risky bond When yields on different Treasuries are  plotted against their corresponding maturities,  we get the Yield Curve
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Shape of the Yield Curve Under normal economic circumstances, the  yield curve is upward sloping and is called the  normal yield curve An inverted or downward sloping yield curve,  i.e. shorter term interest rates exceeding  longer term interest rates, is usually observed  during economic contractions A flat yield curve may also be observed from  time to time
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Measuring Bond Yields Yield to maturity Most commonly used Promised compound rate of return  received from a bond purchased at the  current market price and held to maturity Equates the present value of the expected  future cash flows to the initial investment Similar to internal rate of return
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Coupon It is the agreed interest payment made  to the holders of bond during the term of  the bond
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Topic 7 - Topic7:Bonds Bondsyield,couponandpricing theories...

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