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13 votes
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Cochrane on Return Predictability

Let $P_t$ be the price of the overall market index at the end of quarter $t$ Let $D_t$ be the dividend for the overall market in quarter $t$ Let $X_t = \frac{D_t}{P_t}$ be the dividend to price ratio. ...
Matthew Gunn's user avatar
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10 votes

Cochrane on Return Predictability

Maybe I am a little bit late to the party, but I want to give a shot. As in Campbell and Shiller, start from the identity $R_{t+1}\equiv\frac{P_{t+1}+D_{t+1}}{P_t}$ where $R_{t+1}$ is the gross return ...
fni's user avatar
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7 votes
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Why does the YTM equal the coupon rate at par?

Let $P$ denote the dirty price, $F$ the face value and $i$ the YTM. Using the geometric sum we get \begin{align} P &= \sum_{j=1}^n \frac{C}{{(1+i)}^j} + \frac{F}{(1+i)^n}\\ &= C\frac{1-\...
Andrew's user avatar
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7 votes
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Par Yield, Bond Yield and Zero Rate

Let's assume we have yearly cash flows, and let's focus on just two years - year 1 and year 2. Let $R_1$ and $R_2$ represent the zero rates of year 1 and year 2. So if you want to borrow for one year, ...
Magic is in the chain's user avatar
7 votes
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reason behind bond yield diverge for bonds with the same maturity during 2008 crisis

Just to elaborate on the comments above to include some visuals. As you pointed out, the high coupon, seasoned 10.625s traded at a steep discount. The first chart below shows the yield spread against ...
Helin's user avatar
  • 11.7k
7 votes

How to compute par yield from zero rate curve?

For simplicity, let us assume continuously compounded zero rates and periodically compounded par yields. If you have to work with continuous rates, you may adapt the formulas accordingly. Using the ...
Kermittfrog's user avatar
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7 votes
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Data on historical, cross-country nominal yield curves

First, a quick comment on Bloomberg symbols such as USGG10YR. These are actually yields on "generic bonds"; typically these are benchmark, on-the-run ...
Helin's user avatar
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6 votes

question regarding carry & roll of a bond

Carry and roll-down are two different measures. The carry is the PNL resulting from holding a position. However, even if you don't finance the bond in repo, you can still measure your carry as the ...
Riccardo's user avatar
6 votes
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question regarding carry & roll of a bond

The formula you quote (forward minus spot) is the yield carry for a financed position. The problem is that different people use the word carry to mean different things. The most commonly used ...
Helin's user avatar
  • 11.7k
6 votes

Does the rolling of bond payments from non-business days to the next or previous business day affect the calculation of accrued interest and YTM?

It all depends on the individual bond/loan. Read the bond prospectus. Fixed $C\%$ per year, coupon frequency $n$, usually means exactly $C/n$ regular coupons. The daycounting convention is used if the ...
Dimitri Vulis's user avatar
5 votes
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Yield-to-Maturity and its assumption

It's simpler to just think of the yield to maturity as the internal rate of return of the bond given the current price. It's like the discount rate you would apply to the final payout and coupons, ...
John's user avatar
  • 5,401
5 votes

Constructing yield curve directly from yield-to-maturity data

Unless all of your yields are par yields (yield of bonds trading at par), you'll get very unreliable results if you fit your curve using yields alone. This is because yields can be distorted by the ...
Helin's user avatar
  • 11.7k
5 votes

Why does the ultra long-end of a yield curve invert?

I would not say that this is universally acknowledged but here is my view: Instead of considering par rates, i.e. 10Y and 20Y, consider forward rates, such as 10y and 10y10y. The useful difference ...
Attack68's user avatar
  • 10.5k
5 votes

Why does the ultra long-end of a yield curve invert?

Suppose 40yr bond and 30yr bond have the same yield. It is a mathematical fact as @attack68 has pointed out, that the convexity of the 40yr is greater than the convexity of the 30yr bond. So ...
dm63's user avatar
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5 votes
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Hedging EURUSD with negative rates

For a US investor to hedge the bonds the investor would (1) Buy EURUSD in the Spot market, (2) Buy the German bonds with the EUR proceeds, (3) Short EURUSD in the forward market to provide a ...
Alex C's user avatar
  • 9,382
5 votes

Hull's book par yield example

c is the coupon of the bond, so it is paid semiannually. You can see this from the LHS of the first equation, which is the sum of present values of the coupons and principal. The 6.87 and the 6.75 ...
dm63's user avatar
  • 17.1k
5 votes

Pricing a bond denominated in USD but issued in Europe

If this German company already has other similar debts denominated in USD, and you are able to observe the yields at which they trade, then you can just interpolate their yields to the maturity of ...
Dimitri Vulis's user avatar
5 votes

Unexpected negative roll yield on USD/EUR forward?

I am not sure what you mean with unexpected negative yield? Who claims covered interest rate parity (CIP) is an unbiased forecast for exchange rates? Empirically, random-walk (RW) forecasts (which in ...
AKdemy's user avatar
  • 8,924
4 votes
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Do all bonds of the same maturity have the same yield to maturity?

In practice, bonds of the same maturity will have yields that vary slightly from each other. Several possible reasons (a) a bond with a higher coupon is effectively shorter maturity than a bond with ...
dm63's user avatar
  • 17.1k
4 votes

Intuitively, why does liquidity premium contribute to bond yield?

For clarity, I'll use two expressions, "liquidity premium" and "illiquidity premium": "Liquidity premium" arises when investors value the liquidity profile of an instrument so much that they are ...
Helin's user avatar
  • 11.7k
4 votes

What's the logic behind 3-10 UST yield inversion predicting recession?

When the market enters a risk-off period the investors proceed to a rotation between more risk assets (commodities, equities etc...) to the less risky ones. At this point there is just a lot of supply/...
Ezy's user avatar
  • 2,187
4 votes
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Why does the ultra long-end of a yield curve invert?

It's an interesting question. The fundamentally devout macro wannabe-strategist within cries out for a long-term growth/inflation expectation narrative. However, the cynical realist within reminds ...
demully's user avatar
  • 5,071
4 votes
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Computing T-Bill Yield across leap year boundary

Due to the leap year 366 days need to be used here to match UST conventions (which is ACT/ACT). In this case it doesn't matter whether your interest period extends to only 1 day after the 29th of ...
oronimbus's user avatar
  • 1,896
4 votes
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How to get the price of a bond if the yield is given or viceversa in QuantLib

To get the bond yield from the price: ...
David Duarte's user avatar
  • 5,815
4 votes

Pricing a bond denominated in USD but issued in Europe

You should use the US Treasury yields but this is probably not the only thing you should take into account in pricing that bond. I don't know if the bond you are trying to price would strictly qualify ...
Alper's user avatar
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4 votes
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Strange Market Data YTM for a Zero Coupon Bond

This bond has a slightly different calculation logic to your average zero coupon bond. Denote $t$ the trade date, $t_0$ the issue date, $T$ the maturity date and $P$ the traded price. You'll first ...
oronimbus's user avatar
  • 1,896
4 votes
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Computing treasury note/bond prices from yield

The answer to this is the calculation mode of the bond. The street convention is to use your formula as you have stated, which uses a compounded interest formula for the first period. But the Federal ...
Attack68's user avatar
  • 10.5k
4 votes

How to calculate YTM in case coupon payments are reinvested at a different rate than the bond's coupon rate?

In my opinion it's a flawed argument because there is no reinvestment assumption in the ytm computation. Investopedia is not a reliable source generally. It is a common fallacy to state the ...
AKdemy's user avatar
  • 8,924
3 votes
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Why should central bank intervention cause inverted yield curve to be less effective as a recession signal?

He's talking about central bank intervention in the longer maturities, not the short end. The Fed bought a lot of long dated Treasuries, which helped flatten the curve. Hence an inverted curve may ...
dm63's user avatar
  • 17.1k
3 votes

Difference between Excel's Rate Function and Paul Wilmott's Goal Seek Method for finding YTM

I did some tinkering with the numbers... It seems to me that Wilmott is expressing his answer as a continuous time interest rate. Notice that $e^{0.0658}=1.03347\times2$. That is how your answer 3....
Alex C's user avatar
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