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Accrued Interest
The amount which the buyer of a fixed-income security must pay the seller of the security to compensate the seller for holding the security between the last coupon payment date and settlement date. The accrued interest, added to the instrument's dollar price, constitutes the net amount, net proceeds or invoice amount. How this accrued interest is calculated varies from security to security. Depending on the type of bond, the accrued interest calculation uses one of several day count conventions for calculating the difference between two dates. The most common day count conventions are Actual/Actual, 30/360, and 30/360 European.
Average Life The weighted average time to receipt of principal payments (including scheduled paydowns and repayments). Average Maturity The market value weighted average maturity of the bonds in a portfolio, where maturity is defined as Stated Final for bullet maturity bonds and Average Life for amortizing instruments, including mortgage pass-throughs, CMOs, amortizing asset-backed securities and ARMs. Average Yield The market value weighted average Yield to Maturity/Option a bond. If the bond is trading to the call or put date, the yield to the option date is used. If the bond is trading to the maturity date, the YTM is used.Book Price The amortized carrying cost of the security as of the pricing date. For Treasuries, Agencies, Corporates, ABS and Municipals, the Scientific (Constant Yield) amortization method is used. Securities which are trading to call/(put) as of the Acquisition Date are amortized to the nearest call/(put) date and price. Bond Equivalent Yield Discount securities, like Treasury bills, are quoted on a bank discount basis. But the discount basis is not a yield, and so cannot be compared to yields of other instruments. The bond equivalent yield converts the price implied by the discount basis into a yield which is directly comparable to that of other investments. Call Price, Call Date, and Yield to Call Some bonds may be callable before maturity by the issuer, typically on coupon payment dates. Frequently, these issues pay par plus a premium over par on the call date for the right to call the bonds prior to maturity. This is referred to as a non-par call. Call provisions (i.e. the call premium and the applicable dates) in conjunction with current market conditions will affect the expected cash flow of the bond. Market participants frequently evaluate these securities by calculating yields to these call dates, especially if there is a strong likelihood that the issuer will exercise these rights. The lowest of the yields, under all scenarios, is called the "yield to worst" (we will leave aside the affects of sinking fund provisions on the "yield to worst", at this time). The yield to worst can become the effective yield measure used by the market to price the issue. It is a "Street" convention to price par-callable bonds using their next call date if they are trading above par, and to price them to maturity if trading at, or below, par.
The copyright of the article BOND BASICS - I in Fixed Income & Bonds is owned by Naeem Akhtar. Permission to republish BOND BASICS - I in print or online must be granted by the author in writing.
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