VRM 11. Bond Yields and Return Calculations

Learning Objectives

1) Distinguish between gross and net realized returns and calculate the realized return for a bond over a holding period including reinvestments.

2) Define and interpret the spread of a bond and explain how a spread is derived from a bond price and a term structure of rates.

3) Define, interpret, and apply a bond’s yield-to-maturity (YTM) to bond pricing.

4) Compute a bond’s YTM given a bond structure and price.

5) Calculate the price of an annuity and a perpetuity.

6) Explain the relationship between spot rates and YTM.

7) Define the coupon effect and explain the relationship between coupon rate, YTM, and bond prices.

8) Explain the decomposition of the profit and loss (P&L) for a bond position or portfolio into separate factors including carry roll-down, rate change, and spread change effects.

9) Explain the following four common assumptions in carry roll-down scenarios: realized forwards, unchanged term structure, unchanged yields, and realized expectations of short-term rates; and calculate carry roll down under these assumptions.