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

Quiz 2

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.

Quiz 3

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

Quiz 4

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)

Xvariable