Risk free interest rate with maturity n is ytmn two

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Risk-free interest rate with Maturity n is YTMn - Two types of coupon bonds are Treasury notes and treasury bonds. - Yield to maturity for a bond is the IRR of investing in the bond and holding it to maturity. It is the single discount rate that equates the present value of the bond’s remaining cash flows to its current price - P = CPN X 1/y X (1 – 1/(1+y)^n) + FV/(1+y)^n
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- Coupons can trade at a discount, a premium, or at par Premium = Coupon rate > YTM, Par = Coupon rate = YTM, Discount = Coupon Rate < YTM - Example: Face value of a 25-yr bond is 100 with YTM of .05 and you purchase it for 23.14. Your IRR of your investment will be (100/1.05^25 / 23.14) - 1 = 5% - When a bond is trading at a premium, the price drop when a coupon is paid will be larger than the price increase between the coupons so the bond’s premium will tend to decline as time passes. - A higher YTM implies a higher discount rate for a bond’s remaining cash flows, reducing their present value and hence the bond’s price. Therefore, as interest rates and bond yields rise, bond prices will fall and vice versa - Bonds with higher durations are highly sensitive to interest rate changes - Bond prices converge to the bond’s face value due to the time effect, but simultaneously move up and down due to unpredictable changes in bond yields
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  • Spring '10
  • Kaminsky
  • incremental irr

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