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CHANGE UNIT

Current Unit: Unit 13 - Debt Securities

Table of Contents

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BONDS

Bonds purchased above par

• YTM must be less then coupon rate
• Bond selling at par, it's equal to all of the following
  • Coupon or nominal rate
  • Current yield
  • Yield to maturity
• Bond selling at a premium or above par
  • Purchased at a coupon rate that is higher then the current market rate
• Bond Selling at a discount
  • Coupon rate is lower then current market interest
  • YTM would be higher then coupon rate
• Interest Rate Changes
  • Bonds of higher quality experience less price volatility then bonds of lower quality
    • Treasury securities have higher quality then other debt securities such as corporate bonds
  • Declining interest rates
    • Bond prices increase
    • Decreasing yields
    • Corporations call in debt to replace higher interest rate debt with new lower interest rate issues
  • Increasing interest rates
    • Bonds having higher coupons will decline less than bonds having lower coupons

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• DURATIONS
  • Length to maturity and coupon rate
  • Bonds with longer duration with lowest coupon is more sensitive to interest rates
  • MEASURES
    • Effect of an interest rate change on the price of a bond
    • Price volatility by weighting the length of time
    • Is also a weighted average term to bond's cash flow.
  • DOES NOT MEASURE
    • Holding return period on a bond
  • Shortest Duration
    • Bonds with the highest coupon but same maturities
    • Bonds with nearest maturity but same coupons
    • Higher YTM
  • Longest Duration
    • Lowest coupon will have the longest duration