Effective Duration

Effective Duration

Effective Duration (Words <500)

The duration calculation for bonds that have embedded options is known as effective duration. It helps in evaluating the price sensitivity of hybrid security to change the benchmark yield curve. This measure of duration takes into consideration the fact that expected cash flows will fluctuate as interest rate changes and therefore is a measure of risk. (more…)

Basis Point Value

Basis Point Value

Basis Point Value

Basis points represent a unit employed to measure interest rates and other financial percentages. A basis point equals 1/100th of a single percentage point. It can be denoted as 0.01% or 0.0001 in decimal form. (more…)
Equity vs Fixed Income

Equity vs Fixed Income

Equity vs Fixed Income

If a person wants to generate income or appreciation in the future he acquires an asset known as investment. An investment is always purchased to generate more in the future than you invest today. But there is always a risk associated with the investment. Investments instead of profits can also generate losses as they can lose value in the future. For example, you invest in a company and that company goes bankrupt. One can invest in these different types of investments such as bonds, stocks, mutual funds, exchange-traded funds, index funds, and options. This article aims to provide an overview of Equity vs Fixed Income. (more…)
Bond Tranches

Bond Tranches

Bond Tranches

Tranche is a French word meaning slice or portion. They are found in mortgage-backed securities (MBS) or asset-backed securities (ABS). Tranches are segments created from a pool of securities—usually debt instruments such as bonds or mortgages—that are divided up by risk, time to maturity, or other characteristics in order to be marketable to different investors. (more…)
Barbell Strategy

Barbell Strategy

Barbell Strategy

Options are a conditional derivative instrument that allows the buyer of the contract to buy or sell a security at a chosen price. Option buyers are charged an amount called a “premium” by the sellers. Options are divided into “call” and “put” options. In a “Call” option, the buyer of the contract purchases the right to buy the underlying asset in the future at a predetermined price called the exercise price or strike price. In a “Put” option, the buyer acquires the right to sell the underlying asset in the future at a predetermined price. (more…)
Capital structure

Capital structure

Capital structure

What is Capital Structure? Capital structure is basically a combination of debt and equity which is used by the company to finance its operations and overall growth. Debt is loans or bond issues. Short as well as long debts are considered a part of capital structure. Equity is preferred stock, retained earnings, or common stocks. A firm’s capital structure is expressed as a Debt-to-Equity or even Debt-to-Capital ratio. (more…)
Dollar Duration (DV01)

Dollar Duration (DV01)

Dollar Duration (DV01)

  What is DV01 (Dollar Duration)? A bond analysis method that helps an investor ascertain the sensitivity of the bond price to interest rate changes is called Dollar Duration(DV01). It is formally referred to as DV01 (i.e., dollar value per 01) It measures the change in bond price for every 100 basis points of change in interest rates. Bond fund managers use DV01 as a way of approximating the portfolio’s interest rate risk in nominal or dollar amount terms. It is used to calculate risk for many fixed income products such as forwards, zero-coupon bonds, par rates, etc. (more…)
Euroclear System

Euroclear System

Euroclear System

Euroclear System is a clearinghouse that settles and clears securities trades executed on European exchanges. It is one of the two principal securities clearinghouses in the Eurozone. It is a Belgium-based financial service,  specialized in verifying information supplied by brokers in security transactions and the settlement of securities transacted on the European Exchange. (more…)
Zero Coupon Bond Vs Regular Coupon Bond

Zero Coupon Bond Vs Regular Coupon Bond

Zero-Coupon Bond Vs Regular Coupon Bond

Bonds having similar characteristics to the Fixed Deposit in saving banks account. Bonds are lending money to the bond issuers or bond borrower. They are similar to Fixed Deposits, however, the FD’s are lending money to banks. The significant difference between the bonds and fixed deposits is, the bondholder can sell the bond before the maturity of the bond to another investor who is ready to purchase the bond. In return, the bondholder or investor receives an interest in regular intervals till the maturity period and also principle on the maturity date of the bond. Bonds are issued by corporate companies and government Entities. The difference of Zero Coupon Bond Vs Regular Coupon Bond can be understood as under. (more…)
How Are Bonds Rated_

How Are Bonds Rated?

How Are Bonds Rated?

Bond-rating represents the creditworthiness of government or corporate bonds. The ratings are given by credit rating agencies. The big three credit rating agencies are S&P, Fitch, and Moody. 95% of the ratings are given by these three rating agencies. It is an opinion of a particular credit agency regarding the ability and willingness of an entity to fulfill its obligations. Credit rating is used by the investment professionals to access that whether the debt would be repaid or not. The information mentioned below shows How Are Bonds Rated?. (more…)