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bonds (coupon and discount); unit 7
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if YTM < Current Yield< Coupon Rate, then we have a capital __(gain/loss)
loss
bc we are paying more than we earn
Yield to maturity =
current yield + capital gain/loss
discount factor
PV is the ____ , while the FV is the
price we paid for the bond
the amt well get in the future (not including coupon rate)
your CY shows you how much % of your YTM is coming from your ____
interest/coupon payments
if YTM>CR>CY, then we get a capital ___
gain
if we have a capital gain, then this means __(CY/YTM/CR) is our highest measure
YTM
in financial calculator ___ and ___ must be opposite signs(+/-)
PV and pmts (only one needs to be neg)
for ___ we use the unform fixed payments formula and for ___ we use the growth annuity formula
-retirement
-savings
with our retirement payments a majority of the money we make comes from ___ earned
interest
even if we have a capital loss, we may still have made money in terms of _____ ___ and why?
total return
bc capital gain is only concerned with the bond price and FV, not the coupon payments
so if we subtract the capital loss from the money made form coupon payments, we still earned that amount of money
total return =
(capital gains + coupons earned) / price
how much money you made from investing in this bond
what formula do u use to find the holding pd of a DISCOUNT bond?
simple one w few adjustments
--->use the simple formula bc discount bonds only have one formula
i =[ (sale price/PV)^1/holding pd ] - 1
so we swap FV for sale price bc we dont hold it till FV, so we instead put how much money we are making from selling it
--> PV is the price we paid for it
--> n is now holding pd bc we dont hold it until maturity
total gain from selling a discount bond =
sale price - PV
basically how much we sold it for minus how much we paid for it OVER THE WHOLE HOLDING PD (while finding the discount rate is annualized and is on a per year basis)
total return
total gain from selling bond / PV
basically how much we made in relation to how much we paid for it OVER THE WHOLE HOLDING PD while finding the discount rate is annualized and is on a per year basis)
what is the relation between total return on selling a bonds in a certain holding period vs the return (i)
i is the total return annualized
--> so if we take i and compound it over the holding pd we get the total return (bc the total return is over the entire holding pd; duh bc its our TOTAL return)
when finding the holding pd return for coupon bonds, we need ___ bc
finc calculator bc were basically just solving for i, which is the discount factor/ YTM, which we have no formula for!!!
when expressing return of 5%, we want to write it as .____instead
5.00%
basis point format
payment amount for a coupon bond =
Fv * coupon rate
total cash flow of a bond during the holding period
PV of coupon payments during the holding period + (sale price - PV)
total gain of coupon bond =
[(sale price - PV) + coupon payments during holding period]
/ PV
current yield =
PMT / PV
if there is a positive capital gain, then total return on holding period will be ___(</>) current yield and why?
<
the extra yield is from the total gain from the (sale price - PV)
-->so basically bc you sold it for more than you bought it
if there is capital loss on redeptiom on a coupon bond (meaning we sell it for less than we bought it for) then the holding period return will be ____ than the current yield
which means we may be inclined to ___
less than
hold onto the bond until maturity
holding period return will be equal to current yield when
you sell the bond at the same price you bought it for
if a bond is purchases at par, then ___ will be equal to __ and ___
i /discount rate/ YTM = Coupon Rate = Current yield!
interest/discount rates and bond prices have a __ relationship (direct/inverse)
inverse
if the i increases after we bought the bond, the PV will go down
long bonds are ___ (more or less) impacted by chages in interest/discount rates than short bonds
MOREE!! bc its over a long period of time so more money is impacted w the compounding interest
how do money managers use the difference of short and long term bonds impact from interest rates( which is...) when making a portfolio
(long bonds are more sensitive to the inverse relation of interst rates)
lets them see how much volatility they want
(more volatile w long bonds and less with short)
when is the only time we have a formula for interest/discount/YTM?
what are the examples of when we dont?
discount bonds!!!
-fixed payment income
-coupon bonds
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