A put warrant is a company-issued contract to sell back stocks at a specified price and on or before a specific date. Put warrants can be issued independently but are often issued as a sweetener with a debt or equity instrument. Let us discuss what is a put warrant and how does it work. What […]
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A yield to call (YTC) is the interest rate if a callable bond is called before the maturity date. It is the effective rate of return that an investor would receive instead of the usual yield to maturity. The YTC accounts for similar considerations like the coupon rate, time to maturity, and market value of
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Bond yield refers to the return received by the investor. It can be calculated in different ways. The aim is to calculate the income through investment in bonds. Investors can analyze return on investment in bonds through different bond yields. It can be used to analyze the inverse relationship between bond prices and yield as
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Effective annual yield (EAY) or effective annual rate (EAR) considers the compounding effect of return on investment. It provides a realistic annual interest rate of an investment rather than the simple nominal rate. Investors can use the EAY to calculate the actual return on investment. They can also use the EAR to evaluate whether a
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Payment-in-kind or PIK bonds are a special type of bond that does not make coupon payments in cash. PIK bonds make deferred coupon payments or make them in the form of bonds, preferred stocks, or notes. These bonds are commonly issued by companies in financial distress. These are unsecured loans and offer higher coupon payments
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An inverse floater is a type of bond that comes with an inverse relation to a benchmark interest rate. Unlike a floater, an inverse floater’s coupon rate goes in the opposite direction to the benchmark interest rate. An inverse floater is a variable interest rate security that follows the benchmark interest rate in the opposite
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Extendable reset bonds come with an option of resetting the coupon rate and extending the maturity date. Both the bond issuer and the bondholder may hold the right to extend the bond’s maturity date. Extendable bonds come with an embedded option to extend the maturity date; hence these bonds sell at higher prices. It also
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Interest rate changes bring uncertainty to fixed-income instruments like bonds. Duration and Convexity are two concepts that help investors to quantify the uncertainty. Duration measures the sensitivity of the price of a bond due to a change in interest rate. Whereas convexity measures the change in yield and bond price due to a change in
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Stock market indices are typically used to measure the performance of a particular stock market and with each component or segment benchmarking their performance against it. A capitalization-weighted index is a similar concept that accounts for each component of the index with respect to its market capitalization. Market capitalization (or simply market cap) is a
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Bond convexity is the analysis of risk that arises with a change in the interest rate. Bond prices move inversely with a change in interest rate. The relationship between a bond price and interest rate is linear. However, the actual effects include several other factors resulting in a curvature. Convexity is used to assess the
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