Bond Valuation and Duration Flashcards
(33 cards)
What is Yield to Maturity (YTM)?
The annualized rate of return if the bond is held to maturity, assuming all coupons are reinvested at the same rate.
Formula for semiannual coupon bonds: P = ∑ (C/2) / (1 + YTM/2)^t + FV / (1 + YTM/2)^(2N)
What is the formula for calculating Yield to Maturity (YTM) for semiannual coupon bonds?
P = ∑ (C/2) / (1 + YTM/2)^t + FV / (1 + YTM/2)^(2N)
Where P = Current price, C = Annual coupon, FV = Face value, N = Years to maturity, YTM = Yield to maturity.
How do you calculate YTM using a financial calculator?
Inputs: N (Number of years), PV (Current price as negative), PMT (Coupon payment), FV (Par value), I/YR (Solve for YTM).
What is Yield to Call (YTC)?
The annualized yield assuming the bond is called away at the first call date.
Formula is similar to YTM but uses call price as FV and years to call as N.
What is Current Yield?
Measures annual coupon income as a percentage of current price.
What is the formula for Current Yield?
Current Yield = Annual Coupon Payment / Current Price.
What is Macaulay Duration?
The weighted average time to receive the bond’s cash flows, where weights are the present value of each cash flow divided by the bond price.
What are the steps to calculate Macaulay Duration?
- Find the PV of each cash flow using the bond’s yield to maturity.
- Multiply each PV by the period (year) in which it is received.
- Sum these (PV × year) products.
- Divide by the bond’s price.
What is the formula for Macaulay Duration?
D = Duration, y = interest to maturity (Yield to Maturity), c = coupon rate, t = number of compounding periods.
How does bond duration relate to bond price sensitivity?
Duration < Maturity for coupon bonds. It approximates % price change for a 1% change in interest rates.
What are the key inputs for calculating YTM?
- N (Years to maturity)
- PV (Current price)
- PMT (Coupon payment)
- FV (Face value)
What are the key inputs for calculating YTC?
- N (Years to call)
- PV (Current price)
- PMT (Coupon payment)
- Call Price
What are the key inputs for calculating Current Yield?
- Coupon
- Price
What are the key inputs for calculating Macaulay Duration?
- Cash Flows (CFs)
- YTM
- Price
True or False: Current Yield considers capital gains/losses.
False.
What is Modified Duration?
Macaulay Duration / (1 + YTM), used for price sensitivity.
Why is it important to check YTC vs. YTM for callable bonds?
Callable bonds may be redeemed early.
Fill in the blank: The formula for Current Yield is _______.
Annual Coupon Payment / Current Price
Name the non-marketable U.S. Treasury issues.
Series E Bonds, Series EE Bonds, Series H, Series HH, Series I Bonds.
What is unique about Series H and Series HH Bonds?
They pay interest semiannually.
What is unique about Series I Bonds?
They provide inflation protection via a fixed rate plus a variable rate.
What is the main feature of Treasury Inflation Protected Securities (TIPS)?
Principal adjusts for inflation; coupon rate applies to the new principal.
What are STRIPS?
Separate trading of coupon payments and principal, creating zero-coupon bonds.
Which agency is backed by the full faith and credit of the U.S. government?
Government National Mortgage Association (GNMA/Ginnie Mae).
