Chapter 9: Bond Yields and Valuations
- Page ID
- 79439
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)What is our bond paying us?
What is our bond worth?
In this chapter, you will
- Review the importance of bond yields
- Explore the various types of bond yields and bond yield calculations
- Examine the taxable-equivalent yield calculations for municipal bonds
- Discuss bond yield spreads and the bond yield curve and what an inverted bond yield curve can tell us about the future state of the economy
- Explore bond valuation techniques
- Discuss various bond investment strategies and the technique of bond laddering
By the end of this chapter, you should be able to
- Describe the importance of bond yields and the various types of bond yields
- Calculate current yield, yield to maturity, and yield to call
- Calculate the Federal tax-exempt taxable equivalent yield and double tax-exempt taxable equivalent yield for municipal bonds
- Identify wide versus tight (aka narrow) bond yield spreads
- Explain the bond yield curve and what an inverted bond yield curve typically signifies for the near-term future state of the economy
- Calculate bond valuations using a variation of the Discounted Cash Flow Model
- Identify and explain various bond investment strategies and be able to construct a bond ladder investment program
Let’s continue with stodgy, boring, reliable bonds
What is our bond paying us? What is the yield? What is our bond worth? What is its valuation? We will learn how to compute the various bond yields and how to use a bond valuation technique that will be very familiar. We will see that the fixed-income nature of bonds makes predicting bond prices much more reliable than predicting stock prices. We will also discuss the yield curve and some final aspects of bond investing.
Presentation file - Study guide
- 9.1: Bond Yields
- Over the long sweep of time, income is the principal reward an investor receives from investing in bonds. Therefore, it is important to know the yield of our potential bond investment. What is the bond paying us?
- 9.2: Yield Spreads and the Yield Curve
- Yield spreads are the differences in interest rates that exist among various sectors of the bond market. The yield curve is a graph that represents the relationship between a bond’s maturity and its yield at a given point in time. The yield curve has also been a reliable indicator that the economy is heading for a recession.
- 9.3: Bond Valuations
- A bond's value is dependent upon the present value of its future cash flows. Wait, that sounds familiar! Yes, it's the Discounted Cash Flow Model. And since most bonds pay their interest and principal payments reliably, our predictions for bond valuations are also fairly reliable.
- 9.4: Some Final Aspects of Bond Investing
- We will finish our coverage of bonds with some final aspects of bond investing including reinvestment risk, bond investment strategies, and bond laddering.
- 9.S: Summary
- Congratulations ‒ You Have Finished Chapter 9 ‒ Bond Yields and Valuations