Investments: Analysis and Management, 12th Edition

chapter 17

Bond Yields and Prices

Following your study of stocks, you realize you also need to understand the basics about bonds. After all, portfolio theory stresses the virtues of diversification, and that includes asset classes. A little math quickly tells you that $1 million invested in bonds returning 6 percent produces a nominal income stream of $60,000 a year, which seems like a significant annual annuity. By now, however, you have learned that when it comes to investing things are not always what they seem. Maybe bond returns are not as straightforward as they appear to be. Furthermore, you have heard people say that when interest rates rise, bond prices decline, and you wonder why. It becomes apparent to you that knowing something about bond prices and yields could be useful to you as you manage your inheritance.

Chapter 17 provides an analysis of bond yields and prices. Bond market participants use various yield measures unique to bonds when quoting potential returns to investors. However, these measures can mislead unwary investors who fail to understand the basis on which they are constructed. It is important to understand how bonds are valued and how bond prices change over time. We cover here the mechanics of bond calculations, an important part of an investor's toolkit.

AFTER READING THIS CHAPTER YOU WILL BE ABLE TO:

• Understand and calculate various bond yield measures, most importantly the yield to maturity.
• Calculate the price of a bond.
• Determine how bond prices ...