Chapter 3 Flashcards
What Is Yield to Maturity (YTM)?
The term yield to maturity (YTM) refers to the total return anticipated on a bond if the bond is held until it matures.Yield to maturity is considered a long-term bond yield but is expressed as an annual rate. In other words, it is the internal rate of return (IRR) of an investment in a bond if the investor holds the bond until maturity,
what is the rate of return?
A rate of return (RoR) is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost. When calculating the rate of return, you are determining the percentage change from the beginning of the period until the end.
what is irr in finance?
The internal rate of return (IRR) is the annual rate of growth that an investment is expected to generate. IRR is calculated using the same concept as net present value (NPV), except it sets the NPV equal to zero.
What is maturity vs duration?
Duration measures a bond’s sensitivity to changes in interest rates. It estimates how much a bond’s price will change for a given change in interest rates.
Duration is typically expressed in years.
The higher the duration, the more sensitive the bond’s price is to interest rate changes, and vice versa.
Duration helps manage interest rate risk.
Maturity is the length of time until a bond’s principal is repaid. It is the date on which the bond issuer must repay the bondholder the face value of the bond.
Maturity is expressed in years and is essential in determining the bond’s price.
What Is the Macaulay Duration?
The Macaulay duration is the weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price. Macaulay duration is frequently used by portfolio managers who use an immunization strategy.
what is the term structure
of interest rates?
The term structure of interest rates refers to the market interest rates (i.e. spot rates) on bonds with different lengths of time to maturity but with the same or similar risk (i.e. with the same credit rating). It measures the relationship among yields on bonds that differ only in their term to maturity. Essentially, the term structure of interest rates is the relationship between interest rates or bond yields and different terms or maturities.
What Is a Strip Bond?
A strip bond is a debt instrument in which both the principal and regular coupon payments—which have been removed—are sold separately. A strip bond is also known as a zero-coupon bond.
KEY TAKEAWAYS
-A strip bond is a debt obligation whose principal and coupon payments are removed (or stripped) by investment firms or dealers and sold separately to investors.
-An investor who buys the separated principal from the bond, known as the residue, receives an amount equal to the face value of the bond when it matures.
-An investor who purchases the coupons receives the interest they pay on the bond’s maturity date.
-Because no payments are made before maturity, a strip bond has no reinvestment risk.
what is par value?
the original value, when a stock or bond was issued.
What Is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.
The CPI is one of the most popular measures of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI), which measures changes in the prices received by U.S. producers of goods and services
