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Does the yield to maturity of a bond decrease as the bond nears maturity?
Wiki User
∙ 9y ago
Nope it doesn't you suck
Wiki User
∙ 9y ago
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How are bond ratings measured?
Bond ratings are determined by bond rating agencies. The agency evaluates the company's current financial condition, their financial past, and the current market condition, and then makes a decision based on this.
What is the nomenclature name for ch3-ch2-chch-ch2-ch2-ch2-ch3?
oct-3-ene (IUPAC)8 carbonsone double-bond on the third carbonno branches
What is risk in DBMS?
o Interest Rate Risk: One way to measure interest rate risk is to measure the volatility of interest rates. The easiest way to do this (though not necessarily the most correct) is to look at the historic volatility of interest rates. A more complex way to do this is to use mathemtical models to forecast interest rate scenarios. o Credit Risk: Credit risk is evaluated by credit ratings agencies, the most common being Moody's, Fitch, and Standard and Poors. These agencies assign credit rates to corporations and bonds, helping the investor and lenders understand the implicit risk of the borrower/issuer. o Liquidity Risk: Typically the bid-offer spread (the difference between where you buy and sell a product) is a good indication of liquidity risk. For example, if you can buy a stock at $100 and sell it at $99.95, the bid-offer spread is $0.05, and getting out of the trade is considered relatively easy. However, if you could buy a bond at $100 but sell it at $80, the bid-offer spread is $20, and the bond would be considered illiquid. o Event/Geopolitical Risk: This is a tough one to measure. Increasing global tension is generally reflected in price volatility or a runup in certain types of prices (gold, oil, US Govt bonds), but no one can predict when/where major risk-impacting events will happen.
What is Risk neutral probability measure?
A probability measure allocates a non-negative probability to each possible outcome. All individual probabilities together add up to 1. The "risk-neutral probability measure" is used in mathematical finance. Generally, risk-neutral probabilities are used for the arbitrage-free pricing of assets for which replication strategies exist. This is about relative pricing, based on possible replication strategies. The first argument is that a complete and arbitrage-free market setting is characterised by unique state prices. A state price is the price of a security which has a payoff of 1 unit only if a particular state is reached (these securities are called Arrow securities). In a complete market, every conceivable Arrow security can be traded. It is more easy to visualise these securities in terms of discrete scenarios. (On a continuous range of scenarios we would have to argue in terms of state price density.) The arbitrage-free price of every asset is the sum (over all scenarios) of the scenario-payoff weighted with its state price. Any pricing discrepancy with regards to an implicit state price would enable arbitrage in a complete market. The assumption is that the pursuit of such opportunities drives the prices towards the arbitrage-free levels. Hence the state prices are unique. Since the whole set of Arrow securities is the same as a risk-free bond (sure payoff of 1 unit at maturity), the price of the whole set of Arrow securities must be e^(-rt) (assuming we are now at maturity minus t). Risk-neutral probabilities can then be defined in terms of state prices, or vice versa. A probability measure has to fulfil the condition that the sum of all individual probabilities adds up to 1. Therefore, if we want to create an artificial probability distribution based on the state price distribution, we have to multiply each state price with e^(rt) in order to obtain its probability equivalent. It is not surprising then that any expectation taken under the risk-neutral probability measure grows at the risk-free rate. This is an artificial probability measure, why should we create such a construct? This connection allows us to exploit mathematical tools in probability theory for the purpose of arbitrage-free pricing. The main difficulty about risk-neutral probabilities is that the probability concepts used have not initially been developped for the purpose of financial pricing, therefore, two different languages are used, which can easily be confusing. The economic interpretation of a risk-neutral probability is a state price compounded at the risk-free rate. Anything that has an effect on a state price (preferences, real probability, ...), has an effect on the risk-neutral probability. So now we have a bridge to go from state prices to risk-neutral probabilities and back again. What is this good for? According to the second argument, we can, under certain conditions, specify the unique risk-neutral probability distribution of an underlying asset price with the help of an only incomplete specification of its real probability distribution, thanks to the Girsanov Theorem. If the innovation in the price of the underlying asset is driven by a Brownian motion, then all we need to obtain the risk-neutral probability distribution is the volatility parameter. What can we now do with this risk-neutral probability distribution? We can use the first argument to convert the obtained risk-neutral probability distribution back to a state price distribution, and the state price distribution applied to the payoff distribution (i.e. taking the sum over all scenarios) leads to the arbitrage-free price. These arguments save us a lot of trouble when trying to calculate the arbitrage-free price of an asset. They allow us to avoid the estimation of risk premia, by implicitly using those incorporated in the underlying asset price. The arbitrage-free price is, however, NOT independent of risk-premia. The price of the underlying asset is part of the pricing equation, and the risk-premia are inherent in this price, but because the price of the underlying asset is known to us, we obviously do not need estimate it. It is important to emphasise that the risk-neutral valuation approach only works if the asset to be priced can be perfectly replicated. This is often not true in reality, especially when dynamic replication strategies are involved. Paper explaining risk-neutral probabilities: http://ssrn.com/abstract=1395390
Will a bond's yield to maturity increase or decrease if a bond 's price increases?
as yield to maturity increases the bonds price decreases, because a higher yield to maturity means its riskier to investors
Will a bond's yield to maturity increase or decrease when the bond become subordinated to another debt issue?
The yield to maturity will most likely increase because the bond will be considered more risky. This means investors will demand a higher yield to own it. Of course, the yield to maturity will only be higher if all the payments are actually made and the bond doesn't default.
Does the yield to maturity represent the promised or expected return on the bond?
The yield to maturity represents the promised yield on a bond
If a coupon bond is selling at par does the current yield equal its yield to maturity?
Yield usually refers to yield to maturity. If a bond is trading at par it usually means the yield to maturity is equal to the coupon.
Does the yield to maturity represent the promised or expected return on the bonds?
The yield to maturity represents the promised yield on a bond
Yield to maturity vs yield to call?
Yield to maturity assumes that the bond is held up to the maturity date. This is a disadvantage. If the bond is a yield to call , it can be called prior to the maturity date. Thus, the ivestor should sell the callable bond prior to maturity if he expects that he will earn higer return by doing so (in other words when yeild to call is higher than held to maturity).
What is a yield to maturity?
A yield to maturity is the internal rate of return on a bond held to maturity, assuming scheduled payment of principal and interest.
Will a call provision increase or decrease the yield to maturity at which a firm can issue a bond?
Callable bonds will pay a higher yield than comparable non-callable bonds. Take from answers.com
What is the difference between yield to maturity and yield to call?
Yield to maturity means the interest rate for which the present value of the bond's payments equals the price. It's considered as the bond's internal rate of return. Yield to. call is a measure of the yield of a bond, to be held until its call date.
Will a bonds yield to maturity increase or decrease if the bond is downgraded by the rating agencies?
Changing of rating, in and of itself, will not affect the yield, but more generally, a more negative market view will see the yield rise and the price fall.
Why do bond prices and yields vary inversely?
Bonds are valued by discounting the coupon payments and the final repayment by the yield to maturity on comparable bonds. The bond payments discounted at the bond’s yield to maturity equal the bond price. You may also start with the bond price and ask what interest rate the bond offers. This interest rate that equates the present value of bond payments to the bond price is the yield to maturity. Because present values are lower when discount rates are higher, price and yield to maturity vary inversely.
Compute the current price of the bonds if the present yield to maturity is?
Compute the current price of the bond if percent yield to maturity is 7%
