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…
Key Features of Business Models
A business model outlines how a business is organized to deliver value to its customers. A business model encompasses the following aspects: Target customers of the business (“who?”). Products or Services offered by the business (“why and often “why”). Where…
Tests of Independence Using Contingency Table Data
With categorical or discrete data, correlation is not suitable for assessing relationships between variables. Instead, we use a non-parametric test called the chi-square test of independence, which employs a chi-square distributed test statistic. We employ a contingency table to structure…
Tests of Independence
Parametric versus Non-parametric Tests of Independence A parametric test is a hypothesis test concerning a population parameter used when the data has specific distribution assumptions. If these assumptions are not met, non-parametric tests are used. In summary, researchers use non-parametric…
Optimal Capital Structure
The target capital structure of a company refers to the capital the company is striving to obtain. In other words, target capital structure describes the mix of debt, preferred stock, and common equity expected to optimize a company’s stock price….
Modigliani-Miller Capital Structure Propositions
A firm’s capital structure is the mix of debt and equity it uses to finance its investments. A capital structure decision aims to determine the financial leverage to maximize a company’s value by minimizing the weighted average cost of capital…
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…
