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I ran some quick simulations and the differences don't seem particularly drastic:
The black line above is the cumulative total return (inclusive of dividends) of IEF. The yellow line is the so-called "excess return" index for TY (aka ZN), which is the cumulative return of buying and holding TY contracts. To compute this index, I assume that you ...
2
I think I might have found the solution to my own question. The Markov property as stated above has no direct relation with the recombination of the approximating lattice. However, if we consider the "traditional" meaning of Markovness, that is being memoryless, things become clearer.
Consider a binomial tree, where the random variable $X$ can ...
1
Interesting choice, for a school project. If you want to get an idea for how much these things usually don't but sometimes can and do move around, have a look at LQD or HYG/JNK, these being respectively the "investment grade" (ie duller) and "high yield" (ie riskier) universes.
The "yield" you're seeing is what you would get as ...
1
Can I sell them after one month?
Probably - it depends on what type of bond and how liquid (easy to sell) it is.
If yes, will I still get the bond yield/12?
Maybe - but more than likely you'll sell it for more or less than what you paid for it. You do get whatever interest accrues between the time you bought the bond and the time you sell it.
The two main ...
1
IEF as an ETF will also have management costs. Also the duration of IEF is lower since it is holding a basket of 7-10 Yr US Treasuries vs a 10 Yr note future, which is a future on just the 10Yr Note (actually a 10Yr 6% Note). There may be some optionality, such as Cheapest-to-deliver, at play with the future.
Also, you will incur roll risk and costs of the ...
1
All the floating coupons are daycounted. Note that it says Floating Basis: Actual/365. (This is the usual daycount convention for GBP and some other currencies, but for USD the usual daycount convention would rather be Actual/360.)
The first period from October 20, 1999 to November 20, 1999 is odd, short, only 31 actual days. Year fraction 31/365 is 0....
1
I am a co-author of that paper. You may want to check out FinancePy which is a beta version of a finance library where I have implemented the code for calculating the discount margin. Here is an example Jupyter notebook that reproduces (almost exactly) a Bloomberg example.
https://github.com/domokane/FinancePy/blob/master/notebooks/products/bonds/...
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This is not how most people calculate the yield of a floater.
The way most people calculate the yield of a floater is:
1 for each remaining unset coupon, project the values of the index that will be used (such as 3Mo LIBOR, daily SOFR, SONIA, ESTR, etc - see Forecast 3m LIBOR USD. Budget purpose for example); and project the coupons. For example, if a ...
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