You have now learned some of the more advanced topics associated with bonds. Let's run through a quick recap of what we discussed in this tutorial:
- Bonds vary according to characteristics such as the type of issuer, priority, coupon rate, and redemption features.
- Bond prices may be either dirty or clean, depending on when the last coupon payment was made and how much interest has been accrued.
- Yield is a measure of the income an investor receives if he or she holds a bond until maturity; required yield is the minimum income a bond must offer in order to attract investors.
- Current yield is a basic calculation of the annual percentage return an investor receives from his or her initial investment.
- Yield to maturity is the resulting interest rate an investor receives if he or she invests all coupon payments at a constant interest rate until the bond matures.
- The term structure of interest rates, or yield curve, is useful in determining the direction of market interest rates.
- The yield curve demonstrates the concept of the credit spread between corporate and government fixed income securities.
- Duration is the time in years it takes a bond's cash flows to repay the investor the total price of the bond.
- A convex line is formed when the yield and price of a bond is graphed, and this line can exhibit positive or negative convexity.
- If we draw a line tangent to the convex price-yield curve, we draw a line that is equal to duration. The relationship between the linear duration line and the convex price-yield curve allows us to determine the accuracy associated with using modified duration.
- Bonds with greater convexity exhibit less volatility when there is a change in interest rates.
InvestingConvexity is the measure of the curve in the relationship between a bond’s price and its yield.
InvestingBig-money investors can hedge against bond portfolio losses caused by rate fluctuations.
InvestingFind out how this measure can help fixed-income investors manage their portfolios.
Financial AdvisorLearn how an increase in the federal funds rate may impact a bond portfolio. Read about how investors can use the duration of their portfolio to reduce risk.
Financial AdvisorA guide to help to understand the simple math behind fixed-coupon corporate bonds.
InvestingFinancial advisors and their clients should then focus on a bond fund’s portfolio rather than relying on any single metric like duration.