UST 10y and 30y Yield Curve Analysis
What-If the UST rate for the 10y falls .81 bps, and falls .82 bps for the 30y? Bond analysis for the 10y and 30y UST, calculating the Base Totals for each bond, Shock Totals and the Delta.
Bond valuation (a method for determining the fair value of a particular bond) includes calculating the present value of the bond's future interest payments, also known as its cash flow, and the bond's value upon maturity, also known as its face value or par value. Because a bond's par value and interest payments are fixed, an investor uses bond valuation to determine what rate of return is required for an investment in a particular bond to be worthwhile.
Valuation is only one of the factors investors consider in determining whether to invest in a particular bond. Other important considerations are: the issuing company's creditworthiness, which determines whether a bond is investment-grade or junk; the bond's price appreciation potential, as determined by the issuing company's growth prospects; and prevailing market interest rates and whether they are projected to go up or down in the future.
Possible pricing curves for bonds: Swap, Treasury, Libor, Prime, BMA, OIS.
A Bond's Expected Return
Yield is the measure used most frequently to estimate or determine a bond's expected return. Yield is also used as a relative value measure between bonds. There are two primary yield measures that must be understood to understand how different bond market pricing conventions work: yield to maturity and spot rates.
A yield-to-maturity calculation is made by determining the interest rate (discount rate) that will make the sum of a bond's cash flows, plus accrued interest, equal to the current price of the bond. This calculation has two important assumptions: First, that the bond will be held until maturity, and second that the bond's cash flows can be re-invested at the yield to maturity.
A spot rate calculation is made by determining the interest rate (discount rate) that makes the present value of a zero-coupon bond equal to its price. A series of spot rates must be calculated to price a coupon paying bond – each cash flow must be discounted using the appropriate spot rate, such that the sum of the present values of each cash flow equals the price.
