Advanced Bond Concepts: Conclusion
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.
A measure of the curvature in the relationship between bond prices ...
When the shape of a bond's yield curve is concave. A bond's convexity ...
The change required to be made to a forward interest rate or ...
A debt investment in which an investor loans money to an entity ...
The risk of experiencing an adverse shift in market interest ...
The return a bond must offer in order to be a worthwhile investment. ...
Learn how convexity is used for risk management for bond portfolios, and understand the difference between duration and convexity ... Read Answer >>
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The correct answer is c. Bonds with high convexity are less affected by changes in interest rates than bonds with lower convexity. ... Read Answer >>
Learn about convexity of the bonds and how to calculate it in MATLAB with function "bndconvy" after specifying necessary ... Read Answer >>
Learn how to approximate the effective convexity of a bond using Microsoft Excel using a modified and simpler version of ... Read Answer >>
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