Bond Portfolio and Interest Rate Theories

This set of flashcards covers key concepts related to bond portfolio duration, immunisation against interest risk, and theories explaining interest rate behavior.

Duration

A measure of the sensitivity of the price of a bond portfolio to changes in interest rates, calculated as a weighted average of the durations of individual bonds.

Immunisation

The process of structuring a bond portfolio to protect its value against changes in interest rates by matching the duration of the portfolio and the present values of obligations.

Spot Rates

The interest rate charged for money held from the present time until a specific future time, reflecting market expectations of interest rate changes.

Forward Rates

The interest rate agreed upon today for money to be borrowed between two future dates.

Liquidity Preference Theory

The theory that investors prefer short-term securities for their liquidity, necessitating higher yields on long-term securities to attract investment.

Term Structure of Interest Rates

The relationship between interest rates and the time to maturity of debt instruments, typically illustrated by a yield curve.

Yield Curve

A graphical representation showing the relationship between bond yields and maturities, indicating how yields change as maturity increases.

Sensitivity Analysis

The assessment of how the different values of an independent variable affect a particular dependent variable under a given set of assumptions.

Present Value

The current worth of a future sum of money or stream of cash flows given a specified rate of return.

Convexity

A measure of the curvature in the relationship between bond prices and bond yields, indicating how the duration of a bond changes as interest rates change.