Financial Mathematics - Calculation of YTM
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Accounting and Financial Management for Bankers — JAIIB.
One-liners from this chapter
Free sample — 8 of 94 rapid-fire Q&A cards.
What is debt and what does a debt-holder receive instead of ownership?
Sum owed by borrower to lender. Debt-holder becomes creditor; receives guaranteed coupon + redemption payments.
Define bond valuation using the intrinsic value approach.
Present value of all future cash flows (periodic coupons + terminal redemption) discounted at required rate of return.
What three adjustments are needed for semi-annual coupon bond valuation?
Halve annual coupon to I/2; halve required rate to k_d/2; double years to 2n periods.
Distinguish Current Yield from Rate of Return.
CY: coupon only at current price, ignores capital gain/loss. ROR: includes coupon + capital gain/loss during holding period.
Define Yield to Maturity (YTM) and its key assumptions.
Single discount rate equating PV of all cash flows to current market price. Assumes hold-to-maturity and coupon reinvestment at same YTM.
State Theorem 1, 2 and 3 of Bond Value (Malkiel).
Theorem 1: k_d=c ⇒ V=F (par). Theorem 2: k_d>c ⇒ V<F (discount). Theorem 3: k_d<c ⇒ V>F (premium).
What does Theorem 6 state about bond price and YTM relationship?
Bond price is inversely related to YTM; price rises when YTM falls and vice versa.
Explain Theorem 7 on bond maturity and price sensitivity.
Longer maturity ⇒ larger price change for given YTM change; short bonds have less price volatility.
PDF study notes
More chapters in Module C - Financial Management
Master the full AFM syllabus
Every chapter of Accounting and Financial Management for Bankers — videos, tests, notes and one-liner decks in one place.