-
asked price
the price a dealer is willing to take for a security
-
bid-ask spread
the difference between the bid price and the asked price
-
clean price
the price of a bond net of accured interst; this is the price that is typically quoted
-
dirty price
the price of a bond including accrued interest, also known as the full or invoice price. this is the price the buyer actually pays
-
real rates
interest reates or rates of return that have been adjusted for inflation
-
nominal rates
interest rates or reates of return that have not been adjusted for inflation
-
fisher effect
the relationship between nominal returns, real returns and inflation
-
term structure of interest rates
the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money
-
inflation premium
the portion of a nominal interst rate that represents compensation for expected future inflation
-
interest rate risk premium
the compensation investors demand for bearing interst rate risk
-
treasury yield curve
a plot of the yields on treasury notes and bonds relative to maturity
-
default risk premium
the portion of a nominal interst rate or bond yield that represents compensation for the possiblity of default
-
taxability premium
the portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status
-
liquidity premium
the portion of a nominal interst rate or bond yield that represents compensation for lack of liquidity
-
Bond Value = PV of coupons + PV of par
Bond Value = PV of annuity + PV of lump sum
This implies that...
As interest rates increase, present values decrease
So, as interest rates increase, bond prices decrease and vice versa
-
If YTM = coupon rate, then par value =
Bond Price
-
If YTM > coupon rate, then par value > bond price why?
Why? The discount provides yield above coupon rate
–Price below par value, called a discount bond
-
If YTM < coupon rate, then par value < bond price
Why?
- Why? Higher coupon rate causes value above par
- Price above par value, called a premium bond
-
Current Yield vs. Yield to Maturity
- Current Yield = annual coupon / price
- Yield to maturity = current yield + capital gains yield
|
|
