Essays on Bond Yield Measures Inform Investors Of The Rate Of Return On Bonds Under Different Assumptions Assignment

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IntroductionMeasures of yield are different and varied. They take on different approaches with the aim of ensuring efficiency, tranquillity, reliability, accuracy, and accountability of the different investment strategies that investors opt for (Parameswaran, 2007). The manner in which investors analyze business and investment opportunities are influenced by a number of factors that include the different measures of yield employed (Smith, 2011). Treasury securities are vital aspects of yield measures that could be discussed based on their maturity characteristics and the actual manner in which bonds are spread. According to Fabozzi (2005), the yield on any given investment denotes the interest rate on that investment.

The yield of a bond investment refers to the present value of the bond’s expected cash flow from the investments to the bond’s cost. P = ∑ CFt(1+y) tYield to CallCalculation of the yield to call is a vital aspect of measuring yield. Since investment decisions should be done from an informed point of view, it is crucial to ensure that sustainability and improved constant growth is put in place. While the use of the yield to call calculator could be used to establish the level of efficiency and cost effectiveness of the measurement process, it is evident that such a process would be based on the assumption that a particular bond is called within the shortest possible time frame.

Callable bonds could also be calculated with ease thus enabling one to understand the value of a given bond (Schwartz, 1989; Stafford, 2010). Estimation of expected investments on return all callable bonds is possible to undertake ones vital information that include the cost of bond, bond face value, number of years that it would take the bond to mature, years to call, and the call price.

The calculation is done with the understanding that the yield to call is called on the best possible call date (Schwartz, 1989). Mathematically, the yield to call is arrived at using the financial formulate below: Yield to call = ((Annual Interest + ((call price – market price)/ the number of years need to call))) / ((call price + market price) / 2)For instance, when a bond whose face value is $1,000 is bought with a 7.5% coupon and at $ 900 and then it pays interest twice for single year and then ends up being called in duration of 7 years with a face value of 103%, the yield to call could be arrived using the above stated formula.

Based on the above formula, the yield to call would be 9.8%. This applies to the bonds which are often likely to be called before the stated maturity date. As outline in the above calculation, all possible cash flows are often determined by critically conceptualising the different cash flows which occur whenever the issue that is called on the foremost call date is utilised.

An increase in interest rates reduces the bond price while a reduction in the interest rate leads to an increase in the bond prices (Schwartz, 1989; Tuckman, 2011). Absolute Yield SpreadThis is a popular market mechanism of measuring spreads. Absolute yield spread plays a significant role in measuring the spread variation between two bonds (say bond 1 and bond 2) with reference to basis sections. The actual yield on bonds is of great essence in the measurement and derivation of the absolute yield spread (Guillermo, 2012; Smith, 2011).

Mathematically, the absolute yield spread is arrived at as follows:

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