# Key relationship between yields on bonds

remember par: coupon rate=current yield=YTM discount: couupon ratecurrent yield>YTM

a, b, c

easy as 1,2,3

Also, any conceptual question with regard to convexity, duration, implications of call/put options and changes in yields can be easily solved by drawing a price-yield curve and a tangent/secant line to represent duration.

nice sharp I always use that when I am uncertain on a question, always gives the right anwser

Guys did you ever found an exercise where you need to calculate Macaulay duration by discounting the cash flows? I didnt

no, in schweser it says they CFA never tests on that, even though its beneficial to know the relationships betweem effective, modified and macaulay duratio

The most useful is the effective duration, which take in the account also the effect of embedded options.

thats schweser’s reasoning as to why CFA does not test the others

getterdone Wrote: ------------------------------------------------------- > no, in schweser it says they CFA never tests on > that, even though its beneficial to know the > relationships betweem effective, modified and > macaulay duratio I agree – know this. Basically, you need effective for non straight bonds, like callables, convertible bonds, and putables.

im generally confused about macaulay and modified duration? Can anyone explain the two in simple terms?

Macaulay calculate duration in terms of years using the weigthed average of a bond cash flows where the weigth are the period of receipt of cash flow modified duration: THis tells you the % change in the price of a bond for a 1% change in yield

getterdone Wrote: ------------------------------------------------------- > remember > > par: coupon rate=current yield=YTM > discount: couupon ratecurrent yield>YTM From Series 7 land awhile back, I was taught something I have ALWAYS remembered: P N C Y (Pronounced “Pinkie”) P = Price, N = Nominal Yield (Coupon), C = Current Yield, and Y = YTM P N C Y This would be a premium bond: N > C > Y Y C N P This would be a discount bond: N < C < Y

CY not included, you can draw the diagonal line with CPN always in the middle too. Price moves opposite yld. PNCY, nice! Then again, current will always be less than YTM b/c it doesn’t include time value.

The “C” is Current Yield… Reread the post…

Sorry, typed slower than what I was thinking. Ignore my last statement. I did mean CY = current yld in the first statement.

premium are premium precisely b/c the coupon is greater than an investors required rate of return. recall that the YTM is the same as the IRR for any bond.