Fixed income instrument

chandniwadhwani92
Finance Junkie
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Joined: Mon Oct 06, 2014 7:36 am

Fixed income instrument

Postby chandniwadhwani92 » Mon Oct 06, 2014 7:59 am

ABC corp is quoted with a YTM of 4% on a semi-annual bond basis. What yields should be used to compare it with a quarterly pay bond and an annual pay bond.

Concept Not getting. How to solve??????

1 + YTM1 / n ) ^ n = (1 + YTM2 / m ) ^ m

What is m stands for????

edupristine
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Joined: Wed Apr 09, 2014 6:28 am

Fixed income instrument

Postby edupristine » Mon Oct 06, 2014 8:20 am

Here, "n" and "m" stands for the no of compounding periods. For semi annual compounding, n =2, for quarterly compounding , n= 4.

So, For YTM1 "n" represents the no of compounding periods and similarly "m" represents the no of compounding periods for YTM2.

The very formula you specified in the question can be used to change YTM1 with "n" compounding periods into YTM2 with "m" compounding periods.

Let me know if you need more clarification.

chandniwadhwani92
Finance Junkie
Posts: 166
Joined: Mon Oct 06, 2014 7:36 am

Fixed income instrument

Postby chandniwadhwani92 » Mon Oct 06, 2014 2:02 pm

Wat does ytm1 and ytm 2 stands for
Can u plz solve it 4 me
Still not fully cleared

edupristine
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Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Postby edupristine » Tue Oct 07, 2014 6:41 am

YTM is the acronym for Yield to maturity. So, YTM 1 and YTM 2 are two examples of yields to maturity.
Suppose YTM1 = 4% semi annually and you have to find out the equivalent yield when it is compounded quarterly i.e when the no of compounding periods = 4.
Solution: (1+0.04/2) ^2 = (1+YTM2/4)^4.
Now you can solve this equation for YTM2.


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