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. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
  2. Laissez Faire

    An economic theory from the 18th century that is strongly opposed ...
  3. Interest

    The charge for the privilege of borrowing money, typically expressed ...
  4. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  5. Extreme Mortality Bond - EMB

    Investopedia defines extreme mortality bond (EMB).
  6. Coupon

    The annual interest rate paid on a bond, expressed as a percentage ...
RELATED FAQS
  1. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  2. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
  3. What is a basis point (BPS)?

    A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial ... Read Full Answer >>
  4. What are the maximum Social Security disability benefits?

    The average Social Security disability benefit amount for a recipient of Social Security Disability Insurance (SSDI) in 2 ... Read Full Answer >>
  5. How do I calculate the future value of an annuity?

    When planning for retirement, it is important to have a good idea of how much income you can rely on each year. There are ... Read Full Answer >>
  6. Do hedge funds invest in bonds?

    Hedge funds have the freedom to deploy their capital in virtually any manner. They can use leverage, invest in non-publicly ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center