Class Participation

Date: 17th March, 2023

Name: Sankalp Mishra (BD22092)
Section: C

1) Faculty Q. Which company should Atlas Financial Advisors suggest to their client?
My response: Microsoft based on its YTM and high credit rating.
Faculty response: Microsoft and US Treasury bonds both will give almost same yield because
Microsoft bonds will be subjected to tax while there is no tax on US Treasury bonds.

2) Faculty Q. When can a bond give both interest gains and capital gains?
My response: If we buy the bonds at a discount i.e interest rates are high but over a period
of time the interest rate decreases and we sell at a premium.
Faculty response: Faculty acknowledged the answer.

3) My question: While assessing the risk of a bond why is convexity not being considered and
only duration?
Faculty response: Duration itself is sufficient enough to assess the risk of the bond.

Class Learnings:
 Yield of a bond is a function of its credit rating
 One technique to assess the returns of bonds is to look at yield to maturity. Although Bond
Equivalent Yield (Semiannual Yield x 2) is also widely utilised in the industry, Effective Yield
offers more precise yield numbers.
 Even if interest rates had decreased across industries and the price should have risen, Tesla
was trading at a discount as a result of a rating downgrading.
 Longer the term of bond maturity, interest rate risk will be higher and higher the coupon
rate, lesser will be the interest rate risk.
 Duration is used to measure the price change when the interest rate change is minute
however usually the interest rate changes are under 1% and therefore, the duration is able
to calculate the modified bond price accurately.
 When interest rate changes are higher, convexity is used which is basically a measure of
bond’s sensitivity to interest rate changes.