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A note on approximating bond returns allowing for both yield change and time passage

Author

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  • Johansson, Bo

Abstract

A number of papers through the years have addressed the price-yield relationship, the approximation of bond returns and the associated components of price sensitivity. Typically, the research has been focused around the concept of duration and convexity to explain the price sensitivity of a bond to changes in its yield. Fixed income portfolio managers, however, are also interested in what happens to bond prices over a certain investment horizon, i.e. how time passage affect bond returns together with yield changes. Chance and Jordan [1996] examines this in a very neat way by a second order Taylor series expansion around the current market yield

Suggested Citation

  • Johansson, Bo, 2012. "A note on approximating bond returns allowing for both yield change and time passage," MPRA Paper 92607, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:92607
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    File URL: https://mpra.ub.uni-muenchen.de/92607/1/MPRA_paper_92607.pdf
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    Cited by:

    1. Stefanos C. Orfanos, 2022. "A Comparison of Macaulay Approximations," Risks, MDPI, vol. 10(8), pages 1-8, July.

    More about this item

    Keywords

    Bond returns; bond return approximation; bond price sensitivety; duration; convexity; time value ; yield changes; time passage; fixed income; investment horizon; yield scenarios; portfolio optimazation; what-if analysis; break-even analysis; price-yield relationship.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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