Reading #55, Risk and Return

Question 1

three sources of return from a bond

Answer 1

coupon and principal payments, reinvestment of coupon pymt and capital gain/loss if sold before maturity

Question 2

FORMULA: approx mod dur

Answer 2

V_ - V+/ 2V0chngYTM

Question 3

FORMULA: approx effective dur

Answer 3

V_-V+/2V0chngCurve

Question 4

FORMULA: money duration (and per 100 units of par)

Answer 4

annual mod dur x full price, or annual mod dur x(full price/100)

Question 5

FORMULA: PVBP

Answer 5

[(V_-V+)/2]x par x .01

Question 6

FORMULA: approx convexity

Answer 6

(V_+V+ - 2V0)/chngYTMsquared x V0

Question 7

FORMULA: effective convexity

Answer 7

(V_+V+ - 2V0)/chngCurvesquared x V0

Question 8

FORMULA: %chnge full bond price

Answer 8

-ann mod dur(YTM) +1/2 annual convexity(YTM squared)

Question 9

FORMULA: duration gap

Answer 9

macauly dur - investment horizon