APPLICATION TO BONDS

Question 1

How to determine the price of a bond based on the desired yield?

Answer 1

Find the PV of all the cashflows and sum them up, that’s the discounted price (usually this procedure is done in reverse, looking for the ytm corresponding to the price of the bond)

Question 2

What is usually said of the ytm

Answer 2

It cristallizes the whole yield curve

Question 3

What is the formula used to price a bond

Answer 3

P: sum(coupons/(1+YTM)^n) + nominal/(1+YTM)^n)

Question 4

What is the relationship between the price and the rate of return of a security?

Answer 4

When rate increases, price decreases and vice versa

Question 5

How to calculate the return on investment after the borrowing rate changes?

Answer 5

(C1 + P1-P0)/P0 = where C1 is the coupon, P1 is the discounted price at which the investor can sell his bond, ad P0 is the nominal

Question 6

How to calculate returns?

Answer 6

(Current Val/Initial Val) - 1