Bond price and yield

An important aspect of trading these bonds is using expectations of future monthly changes in linking indices, provided by economists, to calculate expected forward real yields and expected forward break-even inflation. Making assumptions about future price index levels allows these forward aggregates to be calculated in the same way that forward nominal bond prices and yields are worked out. 

The first two chapters of this section discuss bond pricing and yields, moving on to an explanation of such traditional interest rate risk measures as modified duration and convexity. Chapter 3 looks at spot and forward rates, the derivation of such rates from market yields, and the yield curve. Yield-curve analysis and the modeling of the term structure of interest rates are among the most heavily researched areas of financial economics. The treatment here has been kept as concise as possible. The References section at the end of the book directs interested readers to accessible and readable resources that provide more detail. 

Using the relationships between bond price and yield described earlier, (3.25) can be rewritten in terms of yield as shown in (3.26), which represents the rate of return earned during the forward period (T T + 1). This is illustrated in FIGURE 3.4. 

FIGURE 17.2 Calculating Bond Price and Yield Using... 

We can apply the same logic with real-world bond prices and yields. Let us take a corporate bond first, the Ford 7M percent of February 2007, traded for settlement on January 6, 2006. This bond accrues interest on a 30/360 basis. 

Part One, Introduction to Bonds, covers bond mathematics, including pricing and yield analytics. This includes modified duration and convexity. Chapters also cover the concept of spot (zero-coupon) and forward rates, and the rates implied by market bond prices and yields yield-curve fitting techniques an account of spline fitting using regression techniques and an introductory discussion of term structure models. 

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