7- Debt valuation Flashcards
How do you calculate the price of a bond?
The present value of the cash flows discounted at a required rate of return
What is the formula for flat yield (YTM)?
Flat yield = (Gross annual coupon/Market price)x100
What does the gross redemption yield/yield to maturity (YTM) represent?
YTM represents the annualised internal rate of return (IRR) if one was to hold on to the bond until maturity.
How do you calculate Net redemption yield (NRY)?
Insert (1-t) as a multiplier in the usual bond price equation
What is the Ex-coupon date?
The date by which the trade must occur if the buyer is to receive the coupon
What is the Ex-coupon period?
The time between Ex-coupon date and when it’s paid out
What is the dirty price of a bond?
The normal (clean) price plus any interest accrued from coupons since last payment
What is Macaulay duration?
Time it takes investor to recover their money invested- relative measure of a bond’s sensitivity to interest rates
What is the Macaulay duration formula?
Duration = Σ(PV of cash flow x time to cash flow)/ΣPV of cash flow
What is Immunisation?
Liability driven investment strategy where investor times duartion of portfolio to maturity of the liability
What is Modified duration?
Approximate percentage change in a bond’s price for a 1% change in yield
What is the formula for Modified duration?
Modified Duration = Duration/(1+yield)
How is convexity of the price v yield curve explained?
Modified duration underestimates the yield decrease when prices rise, yield increase when prices fall
What is the Yield to maturity effect?
The yield expected if all things remain the same
What is the Interest rate effect?
The impact a change in the interest rates had on the yield
