Macaulay Duration
Definition Macaulay duration was introduced in the previous learning objective. It provides an understanding of the bond’s sensitivity to interest rate fluctuations. At its core, Macaulay duration is the weighted average time until a bond’s cash flows are received. It…
Relationship among a Bond’s Holding Period, Macaulay Duration, and Investment Horizon
Holding Period Return (Horizon Yield) This represents the total return an investor anticipates from holding a bond over a specific duration. It’s influenced by the coupon payments received and any change in the bond’s price due to interest rate movements….
Sources of Return from Investing in a Fixed-rate Bond
Sources of Return Investors in fixed-rate bonds achieve returns through the following: Receipt of anticipated coupon and principal payments. Reinvestment of coupon payments. Capital gains or losses are realized when the bond is sold prior to its maturity. Discount bonds…
Compare Monetary and Fiscal Policy
Fiscal Policy Fiscal policy refers to government decisions on taxation and spending. These decisions affect a number of factors in the economy, including: Distribution of wealth and income across different parts of a country. The allocation of resources in all…
Economic Indicators over the Business Cycle
The use of resources necessary for the production of goods and services fluctuates during a business cycle. Specifically, they include fluctuations in inventory management, employment, and investment in physical capital with economic fluctuations. Fluctuations in Workforce and Company Costs Recovery…
Credit Cycles
Credit cycles describe the changing availability and pricing of credit. They describe the growth in the private sector credit, i.e., its availability and usage of loans. Credit cycles are tied to the real economy. When the economy is strong, lenders…
Business Cycle and Its Phases
A business or economic cycle is a recurring expansion and contraction in economic activity affecting broad segments of the economy. Specifically, a business cycle has the following features: A business cycle depends on the enterprise. Business cycles have anticipated sequences…
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…
