Bond spread (or credit spread) refers to the difference in the yield of two bonds because of the difference in their credit ratings. The credit rating of a bond reflects the risk profile of the bond. For example, BB-rated corporate bond will be riskier compared to a Treasury security issued by the Government, which is […]
Fixed Income Securities
Accrued Interest When a bond holder sells the bond to a new buyer between the coupon dates, there will be some interest earned on the bond since the time the last coupon date. This interest is called the accrued interested and must be paid to the seller of the bond. Subsequently, the new owner of […]
An option free (straight line) bond is a simple form of bond. For example, a bond issued by the Treasury for a par value of, say $1000, with a maturity period of five with an annual interest rate of six per cent on maturity value. In such a case, the issuer, in this case – […]
The yield curve refers to the relationship between the interest rates and the time to maturity of a debt. For example, if we plot the interest rate offered by U.S. Treasury for different maturity debt, what we will get is the Yield Curve. The yield curve will have the maturity on the X-axis, and interest […]
This short video demonstrates the relationship between the bond price and yield. If the price goes up, the yield comes down, and vice verse. The video analysis why it happens?
The yield to maturity (YTM) of a bond is the rate of return earned by an investor if he holds the bond till maturity. It is the overall return earned by the investor who purchases the bond at the market price and holds it till maturity. It is the internal rate of return of the […]
In this post, we will demonstrate how you can calculate the price and the yield of a bond using a zero curve. Assume that it is a 3-year bond that pays a coupon of 6% and has a $100 par value. We also have the 3-year zero curve as shown below: The cash flows for […]
It is a passive strategy, which tries to follows the weight age of index on a day to day basis. It is usually taken up with the idea of not underperforming the index, without actively handling the same aggressively. This is a follow-up strategy, with the least risk of underperforming the index. A pure bond […]
There are various kinds of bonds strategies which a person could adopt to get returns out of the bonds he would like to hold in the portfolio. These include: Pure Bond Indexing Strategy Enhanced Indexing by Matching Primary Risk Factors Enhanced Indexing by Small Risk Factors Mismatching Active management by Large Risk Factor Mismatches Full-blown […]
Modified duration indicates the percentage change in the price of a bond for a given change in yield. It is a more adjusted measure of Macaulay duration that produces a more accurate estimate of bond price sensitivity.