Types and Characteristics of Fixed Income Securities
Coupon rate and duration relationship
- the lower the coupon rate, the longer a bond's duration - the higher the coupon rate, the shorter the duration
Discounted Cash Flow (DCF)
- a valuation method used to estimate the value of an investment based on expected future cash flows. - a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices
A customer wishes to buy a security providing periodic interest payments, safety of principal, and protection from purchasing power risk. The customer should purchase:
- TIPS because they offer inflation protection and safety of principal since they're backed by the U.S. government.
yield to maturity
is an investor's total return if they purchase the bond at any point and then hold it until maturity, assuming all interim cash flows are reinvested at that same YTM
Investment Grade Bonds
Moody: Baa and up Standard and Poor's: BBB and up
When doing cash flow analysis on a mortgage-backed pass through security, you would want to know
the avg maturities
An analyst would use the discounted cash flow method in an attempt to find:
the fair market value
If investors hold bonds until maturity, their realized rate of return, assuming all interim cash flows are reinvested at that same rate, would be equal to:
the yield to maturity