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Duration is a linear measure of how the price of a bond changes in response to interest rate changes. It is approximately equal to the percentage change in price for a given change in yield, and may be thought of as the elasticity of the bond's price with respect to discount rates. For example, for small interest rate changes, the duration is ...
Yield to put (YTP): same as yield to call, but when the bond holder has the option to sell the bond back to the issuer at a fixed price on specified date. Yield to worst (YTW): when a bond is callable, puttable, exchangeable, or has other features, the yield to worst is the lowest yield of yield to maturity, yield to call, yield to put, and others.
The standard broker valuation formula (incorporated in the Price function in Excel or any financial calculator, such as the HP10bII) confirms this; the main term calculates the actual (dirty price), which is the total cash exchanged, less a second term which represents the amount of accrued interest.
For example, if you receive payments of $50 per year on a bond for which you paid $1,000 for the yield would be 5%. When you purchase a bond directly from the issuer, the yield and the interest ...
Tree-based bond option valuation: 0. Construct an interest-rate tree, which, as described in the text, will be consistent with the current term structure of interest rates. 1. Construct a corresponding tree of bond-prices, where the underlying bond is valued at each node by "backwards induction":
Duration is a linear measure of how the price of a bond changes in response to interest rate changes. As interest rates change, the price does not change linearly, but rather is a convex function of interest rates. Convexity is a measure of the curvature of how the price of a bond changes as the interest rate changes.
Being relatively simple, the model is readily implementable in computer software (including a spreadsheet). Although computationally slower than the Black–Scholes formula, it is more accurate, particularly for longer-dated options on securities with dividend payments. For these reasons, various versions of the binomial model are widely used ...
Between a bond's issue date and its maturity date (also called its redemption date), the bond's price is determined by taking into account several factors, including: The face value; The maturity date; The coupon rate, frequency of coupon payments, and day count convention; The creditworthiness of the issuer; and