Advanced Bond Concepts: Conclusion
  1. Advanced Bond Concepts: Introduction
  2. Advanced Bond Concepts: Bond Type Specifics
  3. Advanced Bond Concepts: Bond Pricing
  4. Advanced Bond Concepts: Yield and Bond Price
  5. Advanced Bond Concepts: Term Structure of Interest Rates
  6. Advanced Bond Concepts: Duration
  7. Advanced Bond Concepts: Convexity
  8. Advanced Bond Concepts: Formula Cheat Sheet
  9. Advanced Bond Concepts: Conclusion

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.

  1. Advanced Bond Concepts: Introduction
  2. Advanced Bond Concepts: Bond Type Specifics
  3. Advanced Bond Concepts: Bond Pricing
  4. Advanced Bond Concepts: Yield and Bond Price
  5. Advanced Bond Concepts: Term Structure of Interest Rates
  6. Advanced Bond Concepts: Duration
  7. Advanced Bond Concepts: Convexity
  8. Advanced Bond Concepts: Formula Cheat Sheet
  9. Advanced Bond Concepts: Conclusion
RELATED TERMS
  1. Convexity

    A measure of the curvature in the relationship between bond prices ...
  2. Negative Convexity

    When the shape of a bond's yield curve is concave. A bond's convexity ...
  3. Convexity Adjustment

    The change required to be made to a forward interest rate or ...
  4. Bond

    A debt investment in which an investor loans money to an entity ...
  5. Yield Curve Risk

    The risk of experiencing an adverse shift in market interest ...
  6. Required Yield

    The return a bond must offer in order to be a worthwhile investment. ...
RELATED FAQS
  1. How is convexity used in risk management?

    Learn how convexity is used for risk management for bond portfolios, and understand the difference between duration and convexity ... Read Answer >>
  2. How do I use the principles of convexity to compare bonds?

    Read a brief overview of bond duration and bond convexity and why bondholders should take these into consideration when deciding ... Read Answer >>
  3. What is the correlation between a coupon rate and the convexity of a given bond?

    Read about the relationship between the coupon rate of a bond, its yield and its convexity, and why zero-coupon bonds tend ... Read Answer >>
  4. You currently are holding a portfolio of bonds. Interest rates are expected to increase ...

    The correct answer is c. Bonds with high convexity are less affected by changes in interest rates than bonds with lower convexity. ... Read Answer >>
  5. How can I calculate convexity in MATLAB?

    Learn about convexity of the bonds and how to calculate it in MATLAB with function "bndconvy" after specifying necessary ... Read Answer >>
  6. How can I calculate convexity in Excel?

    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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