Bond Yield Under Various Assumptions Essay Example | Topics and Well Written Essays - 2000 words

Bond Yield Under variant Assumptions - Essay ExampleNevertheless, the concept of the bell of a zero verifier obligate articulated in the PowerPoint slides and the concept of the arrange value are similar. One of the more important concepts in nonplus valuation is term to maturity. Term to maturity specifies the date or number of years before a bond matures (or expires) (Reilly and Brown, 2002, p. 697). An another(prenominal) important concept is the coupon of bond which indicates the income that the bond investor pull up stakes receive over the life (or holding period) of the issue of a bond (Reilly and Brown, 2002, p. 697). Other than concepts term to maturity and coupon of bond, the other important concepts include the principal or the par value of the bond but the public is generally familiar with these concepts. II. Measures of Bond Yield Under Various Assumptions (and examples) There are at least five measures of bond product. Each measure involves a set of assumptions. 1. Yield to Maturity (YTM) As pointed out by our PowerPoint slides, Bond prices and interest send risk, the yield to maturity or YTM is the yield promised to the bondholder if the bond held up to maturity and all coupons are reinvested at the promised yield (Slide 17, Bond prices and interest rate risk). ... 214-215). Fabozzi (2008, p. 214) confirmed that yield to maturity is the interest rate that will make the empower value of the immediate payment track down from a bond equal to its market price plus accrued interest. Fabozzi (2008, p. 214) pointed out that an iterative procedure is used to find the interest rate that will make the present value of the cash flows equal to the market price plus accrued interest. Following the Fabozzi (2008, p. 214) example, suppose a bond with a show value of $100 promising payments of 7% per annum payable semi-annually or every six months is being sold at $94.17. Based on the parameters defined for the bond, the bond will earn for the bond b uyer the value of $3.50 every six months plus $100 at the end of the eight year. Fabozzi (2008, p. 214) pointed out that when the discount rate used to obtain the present value of the payments from the bond is 3.5%, the present value of the bond is $100.00. When the discount rate of 3.6% is used to determine the present value of payments from bond, the present value of the bond is $98.80. When the discount rate of 3.7% is used, the present value of the bond is $97.62. When the discount rate of 3.8% is used, the present value of the bond is $96.45. When the discount rate of 3.9% is used, the present value of the bond is $95.30. Finally, when the discount rate of 4.0% is used, the present value of the bond is $94.17. Thus, based on these, Fabozzi (2008, p. 214) concluded that 4.0% is the price of the bond and hence, 4.0% is the semi-annual yield to maturity. All computations came from Fabozzi (2008). Thus, we stack consider that the yield to maturity or YTM of the bond as the interes t actually paid to the investment of $94.17 made by the buyer of bond and the cash flows of $3.50