As time passes, if interest rates remain constant, bond’s carrying value will approach face value. A bond issued at a premium will decline in price, and bonds issued at discount will appreciate.
EAR= (1+(APR/n periods per year))^n periods per year
Standard deviation measures total risk and Beta measures systematic risk.
Fisher Equation: estimates OK using nominal return- inflation= real return
YTM vs YTC: if at call, interest rates are lower than coupon, company will call the bonds because refinancing would occur at lower price save money!
XPNV function requires a CF0
NPV function doesn’t work with unevenly spaced cash flows use XPNV
If a zero-coupon, duration equals time to maturity
Duration directly corresponds to interest rate risk:
%ChangePrice = -Duration*ChangeYTM/(1+ytm/2)
Real rate of interest= diff between T-bill and Inflation
Default Risk Premium= diff between corp bonds and treasury bonds
Interest Rate Risk Premium= diff between 30-year treasury and t-bill
Short term treasury bond rates are sometimes higher than long-term rates because it is expected that the Treasury will stomp out inflation, so rates are expected to fall long-term. You can’t maintain high inflation forever.
When interest rates rise, prices on bonds drop and when rates fall, prices rise
Long term interest rates are generally higher due to increased interest rate risk premiums
In a normal distribution, mean=median=mode
Positive skew: mean>median more than half of returns will be below the mean (on left side)
Negative skew: mean<median more than half of returns above mean (on right side)
Positive kurtosis: longer tails, more mass in tails
Negative kurtosis: more mass in the middle
Expected Return +/- 1 Standard Deviation approximately 68% of the time
Expected Return +/- 2 Standard Deviation approximately 95% of the time
Expected Return +/- 3 Standard Deviation nearly 100% of the time
Leptokurtosis (positive) – tall, thin, excess tails
Platykurtosis (negative) – more mass
=NORMDIST gives you area under the curve to the left of the X value
Efficient frontier: upward sloping part of the curve on left hand side. It represents the combinatioin of weight in a portfolio that mazimizes the relationship between risk and return
Stocks with high stdev and low beta must have a lot of unsystematic risk
Low Return and high risk equity could be good for portfolio diversification if negatively correlated or low beta.
In a regression:
X-variable is returns on the market (independent var)
Y-variable is individual returns (dependent var)