Investments- Chapter 11

inversely related

bond prices and yields are _______

increase, smaller

_____ in bond yield to maturity leads to ______ price change than yield decrease of equal magnitude

long term bond

more sensitve to interest rate changes than short term bonds

sensitivity, increases

as maturity inceases _____ of bond prices to changes in yields ____ at decreasing rate

inversely, sensitive

interest rate risk ______ related to bond coupon rate, low coupon bonds are more _______ to interest rate

inversely related

sensitivety of bonds price to yield change is ______ ____ to current yield to maturity

McCaulay Duration

the weighted average of the tie to receive the cash flows from a bond, measured in years, which tells you the time to be held so total pv of cf received is equal to the current market price paid for the bond

modified duration

financial metric that quantifies the percentage change in a bonds price for a 1% change in yield. it essentially measures how sensitive a bonds price is to changes in interest rates

immunization

strategy to shield net worth from interest rate movemnets

rebalancing

realighing proportions of assets in portfoio as needed

cash flow matching

matching cash flows from fixed income portfolio with those of obligation

deduction strategy

multi period cash flow matching

substitution swap

exchange of one bond for bond with similar attributes and better price

intermarket swap

switching from one segment of bond market to another

rate anticipation swap

switch made in response to forecasts of interest rate changes

pure yield pickup swap

moving to higher yield bonds, usually with longer maturities

tax swap

swapping two similar bonds to recieve tax benefit

horizon analysis

forecast of bond returns based largely on prediction of yield curve at the end of investment horizon

firms respect market prices, to have value, no info can be already be reflected in prices, interest rate movements are hard to predict

fixed income investment stragy