Bond Pricing, Yield Measures, and Total Return推荐.pdfVIP

CHAPTER FIVE BOND PRICING, YIELD MEASURES, AND TOTAL RETURN FRANK J. FABOZZI , PH .D., CFA, CPA Frederick Frank Adjunct Professor of Finance School of Management Yale University In this chapter the pricing of fixed income securities and the various measures of computing return (or yield) from holding a fixed income security will be explained and illustrated. The chapter is organized as follows: In the first sec- tion, we apply the present-value analysis1 to explain how a bond’s price is deter- mined. Then we turn to yield measures, first focusing on conventional yield measures for a fixed-rate bond (yield-to-maturity and yield-to-call in the case of a callable bond) and a floating-rate bond. After highlighting the deficiencies of the conventional yield measures, a better measure of return—total return—is then presented. BOND PRICING The price of any financial instrument is equal to the present value of the expect- ed cash flow. The interest rate or discount rate used to compute the present value depends on the yield offered on comparable securities in the market. In this chap- ter we shall explain how to compute the price of a noncallable bond. The pricing of callable bonds is explained in Chapter 37. Determining the Cash Flow The first step in determining the price of a bond is to determine its cash flow. The cash flow of an op