Chapter 10
Bond Price Equation
= ((C/2)/(YTM/2))*(1-(1/(1+YTM/2)^2M))+(FV/(1+YTM/2)^2M) p.379
Current yield
A bond's annual coupon divided by its market price Current Yield=Annual Coupon/Bond Price
Dedicated Portfolio
A bond portfolio created to prepare for a future cash outlay
Callable Bonds
A bond that is callable if the insurer can buy it back before it matures
Coupon rate
A buns annual coupon divided by its par value. Also called coupon yield or nominal yield Coupon Rate= Annual Coupon/Par Value
Par bonds
Bonds with a price equal to par value. The yield to maturity of a ____ bond is equal to its coupon rate
Premium bonds
Bonds with a price greater than par value. The yield to maturity of a _____ bond is less than its coupon rate
Dollar Value of an 01
Change in bond price resulting from a change in yield to maturity of one basis point
Yield Value of a 32nd
Change in yield to maturity that would lead to a 1/32 change in bond price
Immunization
Constructing a portfolio to minimize the uncertainty surrounding its target date value
Modified Duration
Modified Duration= (Macaulay Duration)/(1+YTM/2)
Dynamic Immunization
Periodic rebalancing of a dedicated bond portfolio to maintain a duration that matches the target maturity date
Clean Price
Price of a bond net of accrued interest; this is the price that is typically quoted
Bond
Security, offers investors series of fixed interest payments during its life and fixed payment of principal when it matures
Yield to maturity
The discount rate that equates a bonds price with the present value of its future cash flows
Interest Rate Risk
The possibility that changes in interest rates will result in losses in a bond's value
Make-Whole Call Price
The present value of the bonds remaining cash flows
Dirty Price
The price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays.
Call price
The price the issuer of a callable bond must pay to buy it back
Price Risk
The risk that bond prices will decrease, which arises in dedicated portfolios when the target date value of a bond or bond portfolio is not known with certainty
Duration
A widely used measure of a bond's sensitivity to changes in bond yields
Discount bonds
Bonds with a price less than par value. The yield to maturity of a _____ bond is greater than its coupon rate
Realized Yield
The yield actually earned or "realized" on a bond
Reinvestment Rate Risk
The uncertainty about the future or target date portfolio value that results from the need to reinvest bond coupons at yields not known in advance
