The most comprehensive educational resources for finance

Bond Features Affecting Interest Rate Risk

We know that a bond’s price is inversely related to the yield. How sensitive a bond price is to yield depends on the various features of the bond such as its maturity, coupon rate, and any embedded options in the bond. Let’s look at how these factors influence the impact of interest rate changes on

Understanding Inverse Price/Yield Relationship in Bonds

The investors in bonds face interest rate risk because the price of the bond is inversely proportional to the changes in interest rates. So, if interest rates rise, the bond’s price will fall and if interest rates fall, bond’s price will rise. But why this inverse relationship? Let’s understand this with the help of an

Key Risks Associated with Investing in Bonds

Bonds are a lucrative investment class for investors and portfolio managers. However, just like any other investment, investing in bonds also has many risks associated with it. This article lists the key risks: Interest Rate Risk: Bond prices are inversely related to interest rates. When interest rates rise, bond prices fall and vice versa. Call

Types of Commodity Investment Strategies

A portfolio manager can use several approaches to make commodity investments. There are three broad approaches: index fund, index-plus strategy, and active long-only strategy. Let’s look at each of these in details. Index Fund Strategy A commodity index fund is a fund that invests in financial products linked to a commodity index. Since investing directly

Why Commodity Index Strategies are Active Investments

In the equity portfolio management, indexing strategies are considered to be passive portfolio management strategies, since a portfolio manager just needs to follow the index and no active management is required. However, the same is not the case with commodity index strategies which are considered to be active strategies. This is so due to several

How Commodity Investments Can Help a Portfolio

There are several benefits that commodities offer to a portfolio manager as a potential long-term investment option. Some of these points are highlighted below: Commodities have negative correlation with other markets such as equities and bonds, which makes it a suitable choice for diversifying the portfolio. In the past, both equities have exhibited similar risk-return

Measuring Interest Rate Risk: Full Valuation Approach

We know that bond prices are sensitive to interest rate changes. A portfolio of bonds will suffer a loss if the interest rates rise and vice versa. Similarly, a short bond position will make losses when interest rates fall. What a portfolio manager is interested in is to know the exact losses his portfolio will

An Overview of Behavioral Finance

‘Man is a rational being’ is a hypothesis that has been proved wrong several times over. Each person has their individual rationale in what they do and this is true in the sphere of investing as well. Referred to as cognitive biases the subject of behavioral finance attempts to understand how these biases affect investment

How to Value a Bond Using Forward Rates

We have seen that a bond can be valued using spot rates by discounting each cash flow by the spot rate for the maturity. We also saw that forward rates can be derived from spot rates. If so, we can also value a bond using forward rates instead of spot rates. Let’s take a specific

How to Calculate Forward Rates from Spot Rates?

Once we have the spot rate curve, we can easily use it to derive the forward rates. The key idea is to satisfy the no arbitrage condition – no two investors should be able to earn a return from arbitraging between different interest periods. Let’s take an example of how this works. Let’s say an