Advanced Bond Concepts: Conclusion

  • Bonds vary according to characteristics such as the type of issuer, priority,coupon rate, and redemption features.
  • Bond prices may be either dirty or clean, depending on when the last coupon payment was made and how much interest has been accrued.
  • Yield is a measure of the income an investor receives if he or she holds a bond until maturity; required yield is the minimum income a bond must offer in order to attract investors.
  • Current yield is a basic calculation of the annual percentage return an investor receives from his or her initial investment.
  • Yield to maturity is the resulting interest rate an investor receives if he or she invests all coupon payments at a constant interest rate until the bond matures.
  • The term structure of interest rates, or yield curve, is useful in determining the direction of market interest rates.
  • The yield curve demonstrates the concept of the credit spread between corporate and government fixed income securities.
  • Duration is the time in years it takes a bond’s cash flows to repay the investor the total price of the bond.
  • A convex line is formed when the yield and price of a bond is graphed, and this line can exhibit positive or negative convexity.
  • If we draw a line tangent to the convex price-yield curve, we draw a line that is equal to duration. The relationship between the linear duration line and the convex price-yield curve allows us to determine the accuracy associated with using modified duration.
  • Bonds with greater convexity exhibit less volatility when there is a change in interest rates.
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