The most comprehensive educational resources for finance

Current Yield of a Bond

Current Yield The current yield of a bond measures the returns an investor can expect if he holds the bond for a period of one year. It is calculated as the annual interest received divided by the current price of the bond. Current Yield = Annual Interest / Current Bond Price The current bond price

Calculate Clean and Dirty Price of a Bond

We know that the clean price of the bond is the offered price of the bond excluding the accrued interest, while the dirty price is clean price plus the accrued interest. In most bond markets, the general convention is to quote the clean price. However, since the bond may have accrued interest at the time

Day Count Conventions

The day count conventions are used to determine how the interest calculations are performed for different fixed-income securities. It is commonly expressed as a fraction. The numerator is usually 30 or actual. The numerator is usually, 360, 365 or actual. The day count conventions vary based on the market, location and currency. For example, euro

How to Read Bond Quotes?

In the bond markets, the prices are quotes as a percentage of par. For example, assume that the par value of a bond is $100. If the quoted offer price for the bond is $98.75, this means that the investor will have to pay $98.75 for the bond with $100 nominal value. The bond selling

How to Read Bond Tables?

Once you know how to read bond quotes, you can easily interpret bond price tables given in newspapers or websites. We will take the example of Treasury bond prices, as shown in the table below: Rate: The first column shows the rate, i.e., the coupon paid by the bond. Note that the highlighted bond pays

Treasury STRIPS

STRIPS stands for Separate Trading of Interest and Principal Securities. These are zero-coupon securities that trade at a significant discount to the face value. STRIPS were introduced by the US government in 1985. Since they are backed by the government, they have near zero risk, and also offer tax benefits. They are also free from

Impact of Liquidity on Bond Spreads

The various bonds trading in the market can have different liquidity. A highly liquid bond will trade very frequently, in large volumes, and will have a very low bid-ask spread. On the other hand a less liquid bond will trade less frequently and will have higher bid-ask spread. The liquid Treasury notes/securities are called “On-the-run”

Omega Index

The Omega Index (or Omega ratio) was developed by Keating and Shadwick in 2002. It is a ratio of the upside variation in the portfolio and the downside variations of the portfolio. The returns of a portfolio are partitioned into losses and gains compared to a threshold value. The Omega ratio is then the ratio

Sortino Ratio

We know that Sharpe ratio is a popular measure for measuring the reward (or excess return) of an asset per unit of risk. One problem with Sharpe ratio is that it is dimensionless, that is, as it uses the standard deviation of returns as a measure of risk. It penalizes both upward and downward volatility

Backwardation and Contango

This video provides a quick review of the concept of contango and backwardation. These two are opposite of each other. A market is said to be in Backwardation, when the prices of a futures contract is trading below the expected spot prices at the contract maturity. A market is said to be in Contango, when