Term
| What the YTM of a fixed-income security equivilant to? |
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Definition
| it's internal rate of return - its the discount rate that equates the present value of all cash flows associated with the instrument to it's price. |
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Term
What is reinvestment risk?
it is higher for bonds with....? |
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Definition
The uncertainty about the return on reinvested cash flows
...higher coupon rates (other things being equal) and potentially higher for callable bonds as well |
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Term
for a bond to have a realised yield equal to it's YTM what must have happened...?
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Definition
| all cash flows prior to maturity must be reinvested at the YTM and the bond must be held until maturity |
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Term
| What does the YTM assume? |
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Definition
| cash flows will be reinvested at the YTM and assumes that the bond will be held until maturity |
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Term
| formula for calculating the price of a perpetuity? |
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Definition
PV of a perpetuiity = C / Y
C = the cash flow that will occur every period into perpetuity
y = yield to maturity |
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Term
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Definition
bond equivilant rate (aka semi-annual pay YTM) = the YTM assuming semi-annual pay.
(BEY = 2 * the semi-annual discount rate)
annual pay YTM assumes 1 payment per year. |
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Term
Coupon effect...
the lower the coupon rate the XXX the interest rate risk.. |
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Definition
greater......... as for any given change in yield teh smaller coupon bond will experience a greater percentage change in price than the larger coupon bond.
and of course the higher the coupon rate, the lower the interest rate risk |
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