Forecasting Fixed Income Returns
LOS-discuss approaches to setting expectations for fixed-income returns
Notes:
Yield to maturity (YTM)—the single discount rate that equates the present value of a bond’s cash flows to its market price.
YTM is the interest rate at which the present value of all future cash flows from the bond (coupon payments ,repayment of the principal at maturity) equals the bond’s current market price.
2 main reasons why realized return may not equal the initial YTM– Rising (falling) rates induce capital losses (gains) ,but increase (decrease) reinvestment income.
invest horizon shorter than the(Macaulay) duration, the capital (gain/loss) impact will tend to dominate
invest horizon longer than duration, the reinvestment impact dominate
09 Jul 2023 - Original by toptradeready.com