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BOND MATH: The Theory Behind the Formulas by Donald J. Smith

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Conclusion

Floating-rate notes and inflation-indexed bonds demonstrate how we can employ a toolkit of bond math techniques to go beyond basic fixed-rate and zero-coupon securities. We have to extend our duration analysis to assess why the required rate of return changes and how that impacts market value. For floaters, changes in credit spreads and benchmark yields impact market value differently. For linkers, changes in the real rate and inflation have different impacts. Best of all, we can understand why and when floaters and linkers have negative duration. Now we can use the toolkit to delve into derivatives and the most commonly used product to manage fixed-income portfolios of assets or liabilities—interest rate swaps.

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