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: Discount bonds feature a coupon rate below the current market rate, while premium bonds have a coupon rate above the market rate. Over time, the book value of…
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: Governments’ actions have a huge impact on any economybecause of two major reasons: Compare monetary and fiscal…
Economic Indicators over the Business Cycle
As we will discuss below, the use of resources necessary for the production of goods and services fluctuates during a business cycle. Fluctuations in Workforce and Company Costs Recovery In this phase, activity levels start to increase, closing the gap…
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
What Is the Business Cycle? The business cycle refers to the recurring pattern of expansion and contraction in economic activity over time. Economies naturally move through periods of growth, slowing activity, recession, and recovery as production, employment, inflation, and consumer…
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…
