Yiud to Majurity ( YTM):- Yaeleh to maturity 44 the inforest rode at whicR the present value ef the strem of pasrmorts are a exactly equal to the cunent price. Yu'eld to madurity alongs quoted oy annual basis E In otherword, Yidd to maturity is qust the imlerna) rode of vetury (IRA) of the bond ot the current brice . & When we diseusing bords, the term gies % gerry used instead . Suppor that a bond uwith fate value F mapes m coupon Payments of %, eack Jar and total number of periods is 1, We fae yearly coupon is C, Suppose aso that the current brice of the bond is P. Then yield to materaty, is the value of A wR tek can be find 1 follous: v Sen 2 Soa tn Gn Gin Yon Ft neon cl ™ Ta ¢ * at L. ™ ‘on ¢ ot ™ Gat ‘ (Fry) ie we Scanned with CamScannerWe can prepare a cash flow sixam:- EP, & yh) Sy > SF +8) YTM & A pecs Met ot whiR P.Y of the above cath flow it Zevo- Thed is, PvV=o 5 - ob Sl 04... GAL » HO sess 9 gg? Otay + + ia DB P= Sb ! + ; & . ae ae ee S$. i a : + tet F mo ltd, (May Cass" m O+ay” 1 4 oi F diay” 2 in (4%mAh - ML EY YL LED ! ! qe tL .| '7 fam” fF. + So irae ‘m ) ” i (7m) ™ Y= A.4arm a, Gm) Ge FN Tee a OF iS") Scanned with CamScanner SHISSI384 ? PPPRAP LALO PPPPPP PPR PPR DDVOKOKVOKLVOKLLOVODVEDEEEDEDEGECCEEEEE p= F- jay + 50 ' Go, |] Bond prsce formua!~ The pce of a band, fauna cuxaetly nN coupon pewsods remaining, to moduritys and a yteld do malurite. of A, satisfies P= Teen + 3f- Tsmmy|> whore F is fame the face value of the bond, ¢ 1° the eon coupon payment, | and Yn ts the number of Coupon payments per gem Examble:. Suppox Word pr face value of a bond e flan. “Aenuo) coupon is 34, , eompouncling Ralf forge Bok of maturity is 2 years. Pmice of the bond P = 9%. them find yell to maturity. A , ° Ye 1 Sn 2 Re flse fe prs 152 Inthis case mat, Nad, Pa Ot, Fe 100» fie/ Pitt Now , we Rae P= P aang + = ['- (Fm rd 1 3 L = 100. % +f °F i +,¥ a [ (ryt! | 3 A= 459% Scanned with CamScannerfree - Yael Curve !- A price- Yield core 6 & grabh whee we plot the price of the bond against the yet of the bond. Consickr prices a4 bere entage of the face value (por value) usith specr'fieal media _ foe Yad curve for 3o eo" bond with severad coupon ved ib enatier (@ The bord prices wit! go down af ee 9° up- @ Conds with Righ coupon vats cost mon, apappppe son ps PPrppesegecns Consider 10¥. Coubon bond omol fi =joo ( Face value of bora) of YTm so, Thm (fer we ae combarcuing ror) el ae eee e c el -Fo 4 fg kh tee ey, el (Hx ye? (4) (ita)? Clea) ol ° © Roe dao, Ce eS = (2 , F else =! oe Pz loo t+ letle+ tes: the Botrmy, el Scanned with CamScannerOVOOKVVOVVVOUOCVUOUOOOOEGEEECCEEGCOOCEEGE Then P= [oo + 10% 30_ = Joo + 300 = #0 No Lt ytmes joy. , Thatk, a= J2 = %?) 00 Ty this case F c pe, £ ( wot (lta pe ta Ute Joo lo L eee aye (use 0:0) ( ny) = [00% 00543085 + 100X/I— 0573088) = Joo ( 0-05 4B085 + d+ 942651) = Joo X 0.999993 P x [oo = face value =F on # — the reason for this Is that the each 82 te coupon payment get equds the joy, yi expected on Hhe invest ment - The value remains at joo everg year. The bond dpe a Joan where the mlerert on the prmerpal & paso! each ean and Rence the prtna'pol vemainy constant. Im this situatron, whene the yoo & cantly equal to the coupon vale, the bond is termed @ far band. oI From above we can say. that the price of bond must derd toward Roo as the ysebl Mmoveases. £ In otherword , Aarrge gidas tenpla Reavy cscountng., So even rears} coupon payment fos itte Present value. Scanned with CamScannerHB the shape of pace yield! curve i convem. since it bends OT] toward the ongen and out toward the florizontal axir.* wa Siemcdandy one con do for bond usith par value lve md oT vyeandey coupon IS Yo. eT eT of YTM=0, Thon e P= $00 + JSHISt---tIS *7] Ne—rsesenaacna stasis isang 30 Hmy © 1 = Joo +15 %30 eT e— = ]00 + 4So ce 5 = 550 of YTm = 187, eee oon ee ('- ae P = Gus pe ots Ceisye = (10° Ko-o1S!030S + Joo K 0:98483454- = Joo, 0-0/5 10305 + 0:984-93434) = Joo X0.39999993 Pa jor = Fave vol — EF ( far point of loo af sr) Price = Yael came PPLPPIPRREP PER ELS. Scanned with CamScannerVPVVOVUVVBUVOUUUUGOOEOOGCEOECGOEEOGCCOCEGG Now we are considering. the infeme of the Hme to motu Fy. . Consider three dlifforont bords A, B,6, Each of there bonds Ros lor, coupon vole but a Rare different makeritg Bonds | __coufon Mate vity A 107%. Bo yeas B Jo 7 fo teow [97 3 Tes. a LAO OVASLNEIZ 3 ALL of there bonds all af par when the yidl a Joy, , Remee the ches pass throush the common bar point. Noo jf YTM =o. Then Juice of A = u " N Pace of B =F + Scanned with CamScanner9f ytTme= lov, , Jt can be dom. Pree of R= F Price of B = F! Price of C= pF” Obrene. a) 4 madunityis irerecca, the price -ytdel curve becomes a teaper; en ontably pivoting. about the paw point. This incrard stecpnen 1% an indication that longer maturities imply greater femartrurty of price do geet Current Viel t- (cy) Is Gurren gi of a bord is defived a follows: a annual coupon payment” 10 = oO 7 hove price Xie. The current yes gives 9 rr of measux of the annua) xeturn of the bond ( thet 8, Cou pon), For exampte!- Crider a ley. , 30- yeaw bond. Ww of 44 is cues Paw that, Joo | they CY = 2. xX Jeo = 19 = aupm role loo (i) For seme bond, pace ir 90, then. ! cy = aol xjoo = MN, whkide rng = IkIb Scanned with CamScanner ARLAPALAPAPPPAPP PPP PPPHPHPHIKVEHgagsOVO OCUVGU COCO CECOSSESSIVSSEIES YPVVHdT.OS Yreld to caus re); Yad do called i: defmed ox the interna vale ofadurn calewaled anuming. thod the bond 1, in fact caWed at the earliest powible dbde. Duration: Duration a Was measure of the sonaihiuity, oF the price of a bond or other debt instrument to a cRange im interest vate. The duration of a fird- income wt, inshument i a weightesd averath average of the time, thad paments Coach floor) ave made. The. weighing Coefficients ave the presemt value of the fndividual cash flows. Supbose cash flows are receied ab times testis ssn - Then the devotion of Hus sheam 1% PY be) to + Pvl) tt --- + PVA») & = Pv (es) + PUA )+-- + PVG) PV ito) tot PVA\t1+- - -+ Pian) tn er Pv. where pV (ty) cenofer He present value of the cack flow that cecurs of time te) PV is the total presont value. and “pve Pv(to) + Pur) +--- + PU Gr ) KA zem-coupor bend, which mapes omy a fiat ‘payment oF alent fos @ chiratton equ te 4s acuity. date. & Nonmzerd coupon bords Rowe clnations sictly eu tha they mabey cates . Scanned with CamScanner§ Macau tay. Durotion’—~ Generel formua beapaney the Macaulay a chiratin sf we use gies in ploe of vote of rhterat, Suppo a frmoneral imafrement mafees payments mm Hamer pe year uth the Payment in periods kK besini Ce» and ther arn hemdds remaining. The Macaulay Duration 3) i defined og n K 2 Fyre lL. . Qa = (tt ¥my 5 cuales yH Vee hes ti kth pened. + and IK iy fime ty m pepeprerererees Fay ® PP Example: 36: See the bop , page no. 56 Considey 4 Fy, bond uw'th 3 yeas to motunite, Ast ume that the bord & sling at $7, yield. Fino! Mecauter duretion. (=I?) eres n 1 Bn 2 Sr 4 r + — + + — Peryrronts: 3s 2S eS a5 as BS 10d Discount 0-962. 0.925 0883 0: $55 oan oFJ07 faster Pv of 355 («SARC BICOL CRBFE BP FOG payments: : Sum of PU & Puce = 94-329 Weta} PPPPPPPPPP PPLE! 6-35 -35__6-52__0-3}- 5 pe ' 0. 034, O03. 0-04) 6-036 6.40 fee __ 91035 sum = |-os Scanned with CamScannerVOODOO O HF OOOO OOOO ddd de ee dbE SSS Time: Ov Olt 0:03 0048 = 0-061 OF 2-520 ° Mocouag Durokion = O-O1d + 01033 + 01049 + 0-061 + 0 OFF + 2-520 = Qt5d 94 1 cleay thot: Macasclay. dovadion < matun ty time, Macaulay duyatin, formeda :~ The Macaulay duration fer a bord wrth a coupom rate ¢ pew porrod , fi ber period, m periods ey Ors and) rac n_pewtods vematnng, > TRE pa lth 2 trace mq mel Jp) 1] my Example: Consider Joy., go-year bond « Let us axume thaf ak ts at fav, thatix, the yeteal & Joy. . Then find Maco cation. ( Compourdling Ralf year'y) a ¢ DB We hose the formula: I+ _ Met mnl cy) ieee Cry ate) non Seve coupon of the bond & equal te tell of the bono! , therefore this bord & pari bond and yteb & equat to coupon, that ic, cae 3 d= i+ +} +0 "to ng Clg Hy em Scanned with CamScanner D=ity ! d= Tt. ME OS 7 ei" Wer jemeees, m= , nz go = 60 =z 6-05 Ue eee ~ Faye] = 1 YX O.946e6 er ol en ee = 99399430 = 9-938 Bdualitative Properties of Durokim!, Seo the book , age 10.59 _———— ‘ . |: Scanned with CamScanner ALPDAPDAAPAA PA PAPPPHPRHPHPHNHHEDHHKEKETCS