Spot Curve, Par curve and Forward Curve
Yields-to-maturity for zero-coupon government bonds could be analyzed for a full range of maturities called the government bond spot curve (or zero curves). Government spot rates are assumed to be risk-free. Spot Curve The spot curve is upward-sloping and flattens…
Par and Forward Rates
Par Rates A par rate is the yield-to-maturity that equates the present value of a bond’s cash flows to its par value (typically \(100\%\) of face value). Spot rates play a pivotal role in determining par rates. For a bond…
Spot Rates, Spot Curve, and Bond Pricing
Spot Rates Spot rates are the market discount rates for default-risk-free zero-coupon bonds. Unlike typical bonds that offer periodic interest payments, these bonds are sold at a discount and repaid at face value upon maturity. Sometimes referred to as “zero…
Yield Spread Measures for Money Market Instruments
Money market instruments are short-term debt securities with original maturities of one year or less. They are a crucial part of the financial market and include a variety of instruments such as overnight sale and repurchase agreements (repos), bank certificates…
Yield Spread Measures for Floating-rate Instruments
Floating Rate Instruments Floating-rate instruments, such as floating-rate notes (FRNs) and most loans, differ from fixed-rate bonds in their periodic payment dynamics. Their interest payments fluctuate based on a reference interest rate, ensuring the borrower’s base rate remains aligned with…
Annual Bond Yield: Different Compounding Periods
The yield on a bond is a measure of the return on investment, which depends on the interest rate and the frequency of compounding. Understanding how to calculate the annual yield for varying compounding periods is essential for investors to…
Yield and Yield Spread Measures for Fixed-rate Bonds
Yield Measures for Fixed-Rate Bonds Understanding yield measures for fixed-rate bonds is essential for investors aiming to assess the potential return on a bond investment. The yield measures, including current yield, yield to maturity (YTM), yield to call (YTC), and…
Matrix Pricing
Matrix Pricing Process Matrix pricing is a valuation method widely utilized by financial institutions to estimate the fair value of a security that is not actively traded. This process is especially significant for bonds and other fixed-income securities, which may…
Relationships Between Bond Prices and Bond Features
Inverse Relationship – Bond Price and YTM The price of a bond and the yield-to-maturity have an inverse relationship. The same is shown in the blue line in the figure below for a bond with a maturity of 5 years…
Bond Price Calculation Based on YTM
Bond Price Calculation The price of a bond is influenced by various factors, including its cashflow features and market discount rate. The cash flow features are periodic payments made to bondholders, such as interest or coupon payments. On the other…
