Practical Uses of Redemption Yield and Duration

treasuhv convenhon U.S. GOVT BOND EQUIVALENT SIMPLE INUREsr (ACT/ BE) 

I I (GD COS of tARUT ANALYSIS I 2 (GOJ l -COUNT E3UIVALCMT TABLE I 3 G0 DISmUNT/ViaP TABLE 

A TIWM CHANGE IN DISCDOKT/ PRICE/ YIELD 0 RESUL1S IN A -0.002S0 CHANGE IN PRICE AND A 0,01015 CHANGE IN YIELO 

Ideally, an instrument s yield indicates what return an investor can achieve by holding it. Such an ideal measure would be a function of the value of the initial investment, the holding period, and the value of the matured investment. It would also take into account any reinvestment of the income received during the holding period—that is, the effect of compounding. A yield measure having these properties may be defined as follows for a simple instrument such as a Treasury bill. 

Consider a T-bill with a term of m days and a price of P. Equation (17.1) may be rearranged to compute the bill s true yield, rm. 

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Finally, Part Three, Selected Market Analysis and Trading Considerations, covers the practical uses of redemption yield and duration as well as trading techniques based on the author s personal experiences at a primary dealer s desk. 

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