Fins 2624 - Portfolio Management Notes Essay

14466 WordsMay 2, 201258 Pages
Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 LECTURE 1 – BOND PRICING WHAT IS A BOND? A bond is a claim on some fixed future cash flows. A commonwealth government bond (CGB) is a bond which pays semi-annual coupons, in which the maturity date/ coupon payment date is on the 15th of every month. A zero coupon bond is a bond with no coupons. The important information of a bond: 1. 2. 3. 4. 5. 6. • 1. 2. Transaction date: T Settlement date:T+2 Coupon payment dates Maturity date YTM Coupon rate Cum-interest or Ex-interest? If ex-interest If> 7 days to the next coupon payment-----> cum-interest YIELD TO MATURITY The Yield to Maturity (YTM) of a bond is:   Interest rate that makes the present value of the bond’s…show more content…
Hence, the market price = Padj Padj = ������ – ������������������. 1 − ������ 3 Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 LECTURE 2 – TERM STRUCTURE OF INTEREST RATES YTM AND HPR Yield to maturity (YTM) reflects the return required and set by the market on the assumption that the bond is held to maturity. In equilibrium, it is also the return that investors can expect to earn over the life of the bond. Holding Period Return (HPR) is the expected return over a future period, and is not based on the assumption that the bond is held to maturity. SIMILARITIES    Both expressed as annualised returns (not effective rates) Use the settlement price as cost base Total returns accounting for both the coupon interest component and the capital gain/loss component DIFFERENCES    YTM is observed and set by the market, HRP is not YTM assumes that coupon interests are all invested at the same rate as quoted YTM, HPR allows for different reinvestment interest rates received at different times YTM assumes that bond is held to maturity, HPR assumes that bond is to be sold before maturity CALCULATING HPR HRP is used for comparing the expected return among alternate investments over the same predetermined holding period. However, to accomplish this task, future interest rates for different lengths are required. P0(1 + ������������������ ������

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