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Fixed Income Class Examples A
Fixed Income Class Examples A
i) Current Yield
ii) Yield to Maturity
iii) Zero Coupon Yield: Spot rates
YTM: Same concept as IRR. It is the rate at which cash flows of the bond are discounted to
arrive at market price of the bond.
After 2 months
Dirty Price
Acc Int
Clean price
Investment
End value
Yrs
IRR
ime CF ZCY PV
1
2
3
4
iii) Inflation
iv) Liquidity
Modified Duration:
Measures sensitivity of Bond price to 100 bps change in yield
D Mod =
What is the change in price if yields increase Change indicated by durati New price
i) 100 basis points 0.0000% ₹ 924.18
ii) 40 basis points 0.0000% ₹ 946.11
iii) 180 basis points 0.0000% ₹ 895.99
Conclusion:
DMod is a good approximation when yield change is smaller, but it is a poor approximation when
This happens because of Bond Convexity
re discounted to
ate as T=0
r approximation when