
asked price
the price a dealer is willing to take for a security

bidask 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 defaultfree, 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

