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.
InvestingUnderstanding this relationship can help an investor in any market.
InvestingInvestors base investing decisions and strategies on yield to maturity more so than coupon rates.