Concept of yield measures, spot rates and forward rates, Financial Management

  • A fixed income security investor can expect to receive a rupee returns from the following sources: (a) Interest payment, (b) Capital gain or loss at maturity or when sold, and (c) Income from reinvestment of the interim cash flow.

  • Other than zero coupon bonds, all fixed income securities make periodic payments in the form of coupon interest until the security is not removed from the portfolio.

  • Current yield measures the rate of return earned on a bond if it is purchased at its current market price and if the coupon interest is received.

  • Yield to maturity is the rate of return earned by an investor who purchases a bond and holds it till maturity.

  • Yield-to-call is similar to yield-to-maturity and is used to calculate the value of a callable bond.

  • Yield-to-put is the rate at which the present value of cash flow to the first put date equals the price plus interest rate.

  • These T-bills are short-term securities with maturity of 91,182 and 364 days. These are issued at a discount and are redeemed at par.

  • Theoretical spot rate is the interest rate that should be used to discount a default-free cash flow.

  • The nominal spread is the difference between the yield for a non-treasury bond and a comparable maturity treasury coupon security.

  • The nominal spread fails to consider the term structure of the spot rates and the fact that, for bonds with embedded option, future interest rate volatility may alter the cash flows.

Posted Date: 9/10/2012 2:48:24 AM | Location : United States

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