By Donald J. Smith
A advisor to the idea at the back of bond math formulas
Bond Math explores the tips and assumptions at the back of universal facts on possibility and go back for person bonds and on fastened source of revenue portfolios. yet this booklet is way greater than a sequence of formulation and calculations; the emphasis is on how you can take into consideration and use bond math.
writer Donald J. Smith, a professor at Boston college and an skilled government coach, covers intimately cash industry charges, periodicity conversions, bond yields to adulthood and horizon yields, the implied chance of default, after-tax premiums of go back, implied ahead and see premiums, and length and convexity. those calculations are used on conventional fixed-rate and zero-coupon bonds, in addition to floating-rate notes, inflation-indexed securities, and rate of interest swaps.
Puts bond math in point of view via discussions of bond portfolios and funding strategies.Content:
Chapter 1 funds industry rates of interest (pages 1–22):
Chapter 2 Zero?Coupon Bonds (pages 23–38):
Chapter three costs and Yields on Coupon Bonds (pages 39–63):
Chapter four Bond Taxation (pages 65–82):
Chapter five Yield Curves (pages 83–106):
Chapter 6 period and Convexity (pages 107–135):
Chapter 7 Floaters and Linkers (pages 137–162):
Chapter eight rate of interest Swaps (pages 163–184):
Chapter nine Bond Portfolios (pages 185–207):
Chapter 10 Bond concepts (pages 209–229):
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Additional resources for Bond Math: The Theory behind the Formulas
The STRIPS program has become very successful, and nowadays government securities dealers quote bid and ask prices on a full term structure of C-STRIPS and P-STRIPS. That success eliminated the proﬁtability of TIGRS, CATS, and LIONS to the investment banks because STRIPS did not need the cumbersome SPE structure. Also, the arbitrage strategy of bond reconstitution emerged. This strategy is to buy the various C-STRIPS and P-STRIPS in sufﬁcient quantity to rebuild a speciﬁc Treasury note or bond.
In Chapter 2 we used Years ∗ PER for the time until maturity, where PER is the periodicity (number of periods in the year), and a discount rate of APRPER /PER. Now we focus on the periodic cash ﬂows and rates. Later in the chapter we’ll deal with accrued interest and pricing the bond for settlement between coupon dates. The yield to maturity (y) per period is the internal rate of return given the cash ﬂows. 4, we see why the bond yield can be interpreted as a “weighted average” of the zero-coupon rates—the PV, PMT, FV, and N are the same.
But ﬁrst a couple of changes are usually made. 6, the interest rate per period is divided by 100 so that it can be entered as a percentage, not as a decimal. Also, the sum of the three terms is zero so that at least one of PV , PMT , or FV must be entered as a negative. That allows for the interpretation that negative inputs imply cash outﬂows and positive inputs are inﬂows. I’ve found that for bond math calculations, it’s best to use PV as negative and PMT and FV as positive, thereby taking the perspective of the ﬁxed-income investor.
Bond Math: The Theory behind the Formulas by Donald J. Smith