CFA 53: Intro to Fixed-Income Valuation Flashcards
market discount rate; required yield; required rate of return
return required by investors given the risk of the investment in the bond
par value
amount of principal on the bond
general formula formula for calculating a bond price given the market discount rate
yield to maturity
internal rate of return on the cash flows - the uniform interest rate such that when the future cash flows are discounted at that rate, the sum of the present values equals the price of the bond. It is the IMPLIED DISCOUNT RATE.
The Inverse Effect (bonds)
The bond price is inversely related to the market discount rate. When the market discount rate increases, the bond price decreases.
The Convexity Effect (bonds)
For the same coupon rate and time-to-maturity, the percentage price change is greater (in absolute value) when the market discount rate goes DOWN than with it goes up.
The Coupon Effect (bonds)
For the same time-to-maturity, a lower-coupon bond has a greater percentage price change than a higher-coupon bond when their market discount rates change by the same amount.
The Maturity Effect (bonds)
Generally, for the same coupon rate, a longer-term bond has a greater percentage price change than a shorter-term bond when their market discount rates change by the same amount.
Spot Rates
yields-to-maturity on zero-coupon bons maturing at the date of each cash flow.
settlement date
When the bond buyer makes cash payment and the seller delivers the security
Why use flat price for quotation instead of the full price?
to avoid misleading investors about the market price of trend for the bond. If the full price were to be quoted by dealers, the investors would see the price rise day after day even if the yield-to-maturity did not change. That is because the amount of accrued interest increases each day. Then, after the coupon payment is made, the quoted price would drop dramatically.
