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A Better Alternative to Conventional Bond in the Context of Risk Management

Author

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  • Gor Khachatryan

Abstract

Under the assumption of flat spot curve, we define functional relationship between conventional and serial bonds’ prices, when the bonds’ parameters (par value, coupon rate and number of periods) are equal. Furthermore, we conduct a thorough study of joint behavior of conventional and serial bonds’ durations, which suggests that if spot curve is flat, and the bonds’ parameters (coupon rate and number of periods) are equal, then conventional bond’s durations (Macaulay and modified) significantly exceed serial bond’s durations. That is, all things being equal, conventional bond has considerably greater weighted average time until repayment and is much more exposed to interest rate risk than serial bond.

Suggested Citation

  • Gor Khachatryan, 2019. "A Better Alternative to Conventional Bond in the Context of Risk Management," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 209-220.
    • Handle: RePEc:ers:journl:v:xxii:y:2019:i:1:p:209-220
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    File URL: https://www.ersj.eu/journal/1419/download
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    References listed on IDEAS

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    1. John B. Guerard & Eli Schwartz, 2007. "Quantitative Corporate Finance," Springer Books, Springer, number 978-0-387-34465-2, December.
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    More about this item

    Keywords

    Conventional bond; serial bond; bond price; Macaulay duration; modified duration.;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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