All About Finance

 The bond prices are not quoted in dollars but in Yield To Maturity (YTM) Yield to Maturity is defined as the rate of return such that if applied across all the maturities from Capital 1 to Capital T the price of the bond is equal to the discounted value of the cash flows paid by the bond. Yield to maturity does not represent expected return on a Bond Yield to Maturity is a complex weighted average of spot rates across maturities. Weighted average of interest rates. Bond price is inversely related to Yield to Maturity A bond sells at par meaning the price of the bond is equal to the principal payment if yield to maturity is equal to the coupon rate A bond sells at discount if coupon rate is below Yield to maturity  A bond sells at premium if its coupon rate is above Yield to Maturity  y = Yield to Maturity c = coupon rate Bond Price (B) = c/y  +  1/(1 + y)T   * (1 - c/y) Use in excel Rate function or Internal rate of return function (irr)

Type of fixed income securities:- A fixed income security is a financial claim with a promised cash flows of fixed amounts and fixed dates. This does not mean that they are risk free. Types of fixed income securities:- 1. Treasuries- Government bonds issued by various governments to conduct their fiscal policy. Fannie Mae and Freddie Mac, these agencies support the function of the housing market and important players in fixed income markets. 2. Municipal Bonds- They are exempt from federal tax in the US and for local investors they are exempt from local state taxes. 3. Corporate Bonds- issued by firms and used to finance business activities 4. Mortgage Backed and Asset Backed securities- Created using financial engineering process called securitization based on underlying pool of other primitive assets such as mortgages, car loans, student loans and so forth. There are three important characteristics that define a bond - Time to maturity, the principal payment which is the payment the ...

 Annuity refers to a constant cash flow repeated for t periods. Annuity with no growth PV(Annuity) = A * 1/r  *  [1 - 1/(1 + r)T] FV (Annuity) = (1 + r)T * PV(Annuity) Annuity with growth rate g  PV(Annuity) = A * [1/r-g [1 - (1+g/1+r)T]] (if r !=  g) PV (Annuity) = A * T/1+r  ( if r = g) Perpetuity is an annuity with infinite maturity Perpetuity with no growth PV(Perpetuity) = A/r Perpetuity with growth rate g PV(Perpetuity) = A/r-g (r>g)

rAPR  be the Annual Percentage Rate with k periods of compunding within a year, interest per period is APR/k, and rEAR be the Effective Annual Rate rEAR  =  (1 + rAPR/k)k  - 1