Yield to Maturity
The market discount rate appropriate for discounting a bonds cash flows
Constant Yield Price Trajectory
The convergence to par value at maturity
Matrix Price
Method of estimating the required yield to maturity of bonds that are currently not traded or infrequently traded. The procedure is to use the YTMs of traded bonds that have credit quality very close to that of nontraded bonds
Effective Yield
Depends on how many coupon payments are made each year and is simply the compound return
Periodicity
How frequently coupon payments are made
True Yield
The yield calculated using these actual coupon payment dates
Street Convention
Bond yields calculated using the stated coupon payment dates
Current Yield (Formula)
Simple Yield
Takes a discount or premium into account by assuming that any discount or premium declines evenly over the remaining years to maturity
Yield to Call
...
Spot Rates
Market discount payments for a single payment to be received in the future
Bond Equivalent Yield =
((Par/Discount)-1)x(365/Days until Maturity)
Yield Spread
difference between the yields of two different bonds
benchmark spred
yield spread realative to a benchmark bond
G-Spread
A yield spread over a government bond
Interpolated Spread
Yield Spreads relative to swap rates
Zero Volatility Spread
The amount which, when added to the benchmark spot rates, produces a value equal to the market price of the bond
Option Adjusted spread
Takes the option yield component out of the z measure. The OAS is the spread to the government spot rate curve that the bond would have if it were option free
Matrix Pricing (Formula)
If the average of the bond years isnt the years of the non trading bond you are trying to match then:
Shorter time period bond + (((Shorter bond years-Non traded Bond Years)/(Longer Bond Years-Non Traded Bond Years) x (Longer Bond Yield-Shorter Bond Yield
Quoted Margin
Margin used to calculate the bond coupon Payments
Required Margin
Margin required to return the Floating Rate Note to its par value
How does credit quality effect Quoted and Required Margins
If Credit quality decreases then:
Quoted Margin < Required Margin
If credit Quality increases then:
Quoted Margin > Required Margin
Forward Rates
Yields for future Periods
No Arbitrage Price
Price calculated using spot rates because if the bond is priced differently there is an arbitrage opportunity.
Relationship Between Short Term Forward Rates and Spot Rates (Formula)
(1+S?)�=(1+S?)(1+1y1y)(1+2y1y)
where Si is the current spot rate for i periods and 1y1y is the rate for a 1 year loan one year from now and 2y1y is a 2 year loan one year from now
Forward Rates given Spot Rates (Formula)
(1+S?)�=(1+S?)(1+1y1y)
where Si is the current spot rate for i periods and 1y1y is the rate for a 1 year loan one year from now
Flat Price
Quoted Price of the Bond
Option Adjusted yield
Yield of the bond if it were option free
Arbitrage free bond valuation approach
The use of discount rates (Spot Rates) to get more accurate bond pricing and in doing so eliminate any meaningful arbitrage opportunities.
Yield to worst
Lowest of all possible yields to call