Forward rates link two zero (aka, spot) rates by ensuring your expected return is the same between two choices: (1) invest at the longer-term spot rate versus (2) invest at the shorter-term spot rate and "roll over" into the implied forward rate. This is an implied forward rate that ignores...
Superficially, the yield to maturity (YTM, aka yield) simply inverts the usual time value of money (TVM) inputs by solving for the yield as a function of four inputs: face (future) value, coupon (payment), maturity (time), and current price (present value). But in terms of interpretation, I...
The theoretical bond price is the present value if the future cash flows are discounted at the spot (aka, zero rates); in other words, it is the price given by discounted cash flow (DCF). We don't expect the traded (observed) price to exactly match because the DCF price is fundamental, yet...
Learning objectives: Compute a bond’s YTM given a bond structure and price. Calculate the price of an annuity and a perpetuity. Explain the relationship between spot rates and YTM.
Questions:
906.1. Exactly one year ago, Sally purchased a $100.00 face value bond that pays a semi-annual coupon...
Learning objectives: Interpret the forward rate, and compute forward rates given spot rates. Define par rate and describe the equation for the par rate of a bond. Interpret the relationship between spot, forward, and par rates.
Questions:
903.1. Assume the following discount function (note...
Learning objectives: Calculate and interpret the impact of different compounding frequencies on a bond’s value. Calculate discount factors given interest rate swap rates. Compute spot rates given discount factors.
Questions:
902.1. Analyst Patricia is analyzing the following four bonds:
Bond...
Learning objectives: Calculate the theoretical price of a bond using spot rates. Derive forward interest rates from a set of spot rates. Derive the value of the cash flows from a forward rate agreement (FRA).
Questions:
713.1. Consider the steep spot (aka, zero) rate curve illustrated below...
AIMs: Define, interpret, and apply a bond’s yield-to-maturity (YTM) to bond pricing. Compute a bond's YTM given a bond structure and price. Explain the relationship between spot rates and YTM. Calculate the price of an annuity and a perpetuity.
Questions:
316.1. Assume the following 2-year...
Hi!
I'm confused about forward interest rate calculation, Hull (ch 4) uses RF=(R2T2-R1T1)/(T2-T1), Tuckman (ch 2) instead computes from formula (1+r(0,2)/2)^4=(1+r(0,1.5)/2)^3+(1+f(1.5,2.0)/2)^1. I'm sure the answer is just here but I can't see... Is it about compounding? Should I memorize both...
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