some basic question (econmic & bond)

  1. In Capital market expectation, Top down is from Macro analysis, selects market then sector then individual securities. So it is top to down. But the bottom up is analysis on fundamental of securities and catch mispricing points. But why the name is bottom up as there is no up in analysis. 2. I would like to know what is the ‘yield on bond’. For example definition, ‘yield on A rated corporate bond’. like it is 7%. what does it mean exactly? what does the 7% mean? I think it is a really basic question but I am confused… - It means a total return on bond? return measured after 1 year has passed? (historical or expectation) (price change + reinvestment income) like… 7yr 100 par, 10% semi annual 105.11 priced bond (by 9% yield) having 9.16 % annual return with reinvestment rate of 7% after 1 yr with same yield of 9% ? (value from 105.11 to 114.735 = price change 104.56 + reinvestment income 10.175) - Or just the market interest rate ? like the current interset rate of 5% (Risk free)… plus some other things specific to that bond (real rate + inflation + any additional risk premiums)? ex) 2+2+0.5+0.5+1 +1 = 7 - or the just the yield that makes the present value of the bond (coupons + principal) equal to the market price? every time I face with the words… I cannot imagine immediately what it is, different from when I see the return on equity is 5%. Can I see it is just the expected return from having that bond ? like having an equity?

soundboy Wrote: ------------------------------------------------------- > 1. In Capital market expectation, > > Top down is from Macro analysis, selects market > then sector then individual securities. > So it is top to down. > > But the bottom up is analysis on fundamental of > securities and catch mispricing points. But why > the name is bottom up as there is no up in > analysis. > > > > 2. I would like to know what is the ‘yield on > bond’. > > For example definition, ‘yield on A rated > corporate bond’. like it is 7%. what does it mean > exactly? what does the 7% mean? > > I think it is a really basic question but I am > confused… > > - It means a total return on bond? return measured > after 1 year has passed? (historical or > expectation) (price change + reinvestment income) > like… 7yr 100 par, 10% semi annual 105.11 priced > bond (by 9% yield) having 9.16 % annual return > with reinvestment rate of 7% after 1 yr with same > yield of 9% ? (value from 105.11 to 114.735 = > price change 104.56 + reinvestment income 10.175) > > - Or just the market interest rate ? like the > current interset rate of 5% (Risk free)… plus > some other things specific to that bond (real rate > + inflation + any additional risk premiums)? ex) > 2+2+0.5+0.5+1 +1 = 7 > > - or the just the yield that makes the present > value of the bond (coupons + principal) equal to > the market price? > > every time I face with the words… I cannot > imagine immediately what it is, different from > when I see the return on equity is 5%. > > Can I see it is just the expected return from > having that bond ? like having an equity? 1. In a bottom up approach, you are correct. You will be looking at individual securities first. But then you also look to see how that stock’s industry is performing and then the country’s performance. You go from bottom to top. An example would be a textile company. After you pick a strong company, you look to see how the textile industry is performing. Is there any complement or substitutes for the products of the company in any other industry? Then you look to see how the country is doing. Is there going to be any problems with the country and any other country? Disclaimer - Just a small example 2. It will be the yield that makes the present value of the bond (coupons + principal) equal to the market price.

Also, from my own understanding (not pulling this from the textbooks), bottom up usually involves picking favourable stocks first, but then looking at the picks, and examining the allocations across sectors, countries, etc. and rejigging if too heavily weighted somewhere. So if the stock picks, ignoring other macro factors, were all clustered in one industry, then a second level of redistribution is done to adhere to allocation limits, reduce concentration/risk, etc.

I think it’s a good idea to understand the ‘yield on A rated corporate bond’. Please correct me if I’m wrong… It’s the discount rate(as described by idreesz) that make the present value of the bond = market price. It’s also the yield to matunity(YTM). But it may not be the return(or IRR) of the bond unless the reinvestment rate = the discount rate. If reinvestment rate < YTM, then IRR < YTM. If reinvestment rate > YTM, then IRR > YTM.