Search found 1556 matches

by magician
Sat Jan 19, 2019 2:56 am
Forum: Investing - Theory, News & General
Topic: Spot Rates for Bonds
Replies: 3
Views: 466

Re: Spot Rates for Bonds

I suspect that those are par rates, not spot rates.
by magician
Sat Jan 19, 2019 2:44 am
Forum: Investing - Theory, News & General
Topic: Equity beta. What does ishares mean?
Replies: 12
Views: 1968

Re: Equity beta. What does ishares mean?

Beta is not a comparison of the security's price to the market's price; it's a comparison of the security's returns to the market's return. Saying that it indicates how the security's price will move with the market is wrong. No doubt there is a simple beta that can be calc'd from annual returns but many market technicians use a price beta which is calc'd using 3 years or more of price data only, usually. When I went to school price beta was very common. What is beta and how to calculate it in Excel? Calculating Beta: Portfolio Math For The Average Investor Price beta may be common, but it's not beta (i.e., the beta that originated in the Capital Asset Pricing Model (CAPM)). However, it is not uncommon for finance types to misuse terms the...
by magician
Thu Jan 17, 2019 6:19 pm
Forum: Investing - Theory, News & General
Topic: Equity beta. What does ishares mean?
Replies: 12
Views: 1968

Re: Equity beta. What does ishares mean?

“Beta is a measure of the tendency of securities to move with the market as a whole. A beta of 1 indicates that the security's price will move with the market. A beta less than 1 indicates the security tends to be less volatile than the market, while a beta greater than 1 indicates the security is more volatile than the market. This definition is wrong. Beta is not a comparison of the security's price to the market's price; it's a comparison of the security's returns to the market's return. Saying that it indicates how the security's price will move with the market is wrong. Beta is the product of the relative volatility of security's returns to the market's returns and the correlation of the security's returns and the market's returns. To...
by magician
Fri Jul 06, 2018 9:07 am
Forum: Investing - Theory, News & General
Topic: Yield curves and bond returns
Replies: 31
Views: 3792

Re: Yield curves and bond returns

Kevin M wrote: Thu Jul 05, 2018 3:00 pm . . . I think the way I'm defining roll return or roll yield is consistent with the most common understanding of it.
I believe that the most common use of the terms "roll return" or "roll yield" relates to profits (or losses) from rolling expiring forward/futures contracts into new forward/futures contracts.

You're describing "riding the yield curve" or "rolling down the yield curve". But I've never heard that called roll return or roll yield.

At least, it wasn't when I was at PIMCO for 6 years. (However, I am aware that finance people love to co-opt terms from other markets, so your usage may be in vogue today.)
by magician
Tue May 22, 2018 2:04 am
Forum: Investing - Theory, News & General
Topic: Do I understand duration correctly?
Replies: 33
Views: 3431

Re: Do I understand duration correctly?

I know of three useful working definitions for duration: 1. Weighted average time for repayment of all coupons and principal at end 2. Time at which a bond holder is indifferent to a one time change in interest rates because of reinvestment of coupons at new interest rate 3. A measure of price sensitivity to interest rate changes Dave For whatever it's worth, 1 and 2 are Macaulay duration, 3 is modified (or effective) duration. For fixed-rate bonds without options, Macaulay duration is close to modified duration (and modified duration equals effective duration). For bonds with options (e.g., callable bonds, putable bonds, prepayable bonds (such as mortgage-backeds)) or floating-rate bonds, Macaulay duration is close to modified duration, b...
by magician
Tue Sep 30, 2014 12:07 am
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 8862

Re: what is risk?

Yet another type of risk is opportunity cost, the money you don't make while waiting for something that may never happen. This one is easy to overlook because the financial press never runs scary stories about it. You can never eliminate all forms of risk, just decide which ones apply to your situation and work to minimize those. Opportunity cost may or may not be a risk; it will depend on whether its value and timing is uncertain. If the value is certain and its timing is certain, it isn't a risk. Risk goes to zero as outcomes approach certainty, yes. The problem is that investors know a lot of things that sometimes turn out not to be true. As you say: that's a problem. The fact that people are ill-informed doesn't change the fact that a ...
by magician
Mon Sep 29, 2014 10:46 am
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 8862

Re: what is risk?

grayfox wrote:First, what is volatility? from Wikipedia, Volatility (finance).
In finance, volatility is a measure for variation of price of a financial instrument over time.
Most people in finance use the terms "volatility" and "correlation" very loosely, and never really know to what characteristic of a security volatility and correlation apply.

In Modern Portfolio Theory, they apply to returns, not to prices. So saying that volatility is a measure of the variation of the price of a financial instrument over time is, well, completely wrong. It's a measure of the variation of the returns of a financial instrument over time, which is a very different beast.
by magician
Mon Sep 29, 2014 1:23 am
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 8862

Re: what is risk?

richard wrote:Which is riskier:

1) Certain to miss your goal by a large margin.

2) May miss your goal by a large margin, may exceed your goal by a large margin.

Under Bob's definition, 2 is riskier - it has more "Uncertainty of outcomes". I find it hard to believe anyone would prefer 1. If so, does that mean everyone would prefer more risk to less risk?
Number 1 is a problem, but it is not a risk.

People prefer things for many reasons. They generally prefer less risk to more risk. They generally prefer fewer problems to more problems. They generally prefer small problems to big problems. Sometimes those preferences conflict; the resolution doesn't undermine any of the three statements I just made.
by magician
Mon Sep 29, 2014 1:20 am
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 8862

Re: what is risk?

telemark wrote:Yet another type of risk is opportunity cost, the money you don't make while waiting for something that may never happen. This one is easy to overlook because the financial press never runs scary stories about it. You can never eliminate all forms of risk, just decide which ones apply to your situation and work to minimize those.
Opportunity cost may or may not be a risk; it will depend on whether its value and timing is uncertain. If the value is certain and its timing is certain, it isn't a risk.
by magician
Mon Sep 29, 2014 1:14 am
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 8862

Re: what is risk?

richard wrote:When Harry Markowitz developed Modern Portfolio Theory in the 1950s, he needed a way to quantify risk. This was before modern digital computers, so he needed a means of quantifying risk that was easy to compute. Volatility met those criteria.
Markowitz never suggested using volatility (of returns) to mean risk, or as a measure of risk. All he did was to say that if you use expected return to measure reward and standard deviation of returns to measure risk, all of his theory still holds.
by magician
Mon Sep 29, 2014 1:10 am
Forum: Investing - Theory, News & General
Topic: what is risk?
Replies: 116
Views: 8862

Re: what is risk?

pkcrafter wrote:Howard Marks of Oaktree Capital has done some good work on risk.

http://www.google.com/url?sa=t&rct=j&q= ... 7554,d.cGU
Howard Marks spoke at the CFA Orange County (CA) annual meeting 1½ weeks ago.

I wish that I'd had the chance to talk to him at length after the meeting. As one who has worked and consulted in risk management for 14 years, I would have loved to spend a lot of time discussing what, exactly, risk is.
by magician
Fri Sep 12, 2014 9:35 am
Forum: Investing - Theory, News & General
Topic: Buffett: Modern investment theory is horse-pucky
Replies: 119
Views: 15277

Re: Buffett: Modern investment theory is horse-pucky

Tigermoose wrote:Most theory is.
A silly generalization.
by magician
Wed Aug 20, 2014 12:31 pm
Forum: Investing - Theory, News & General
Topic: The Worst Investment You Can Make: Buying a Home
Replies: 135
Views: 26603

Re: The Worst Investment You Can Make: Buying a Home

marbleous wrote:The Worst Investment You Can Make: Buying a Horse
That depends on how you calculate the value of your returns.

I've never regretted buying any of our horses.
by magician
Sun Aug 10, 2014 4:51 pm
Forum: Investing - Theory, News & General
Topic: Math question: how to combine two return series?
Replies: 13
Views: 2286

Re: Math question: how to combine two return series?

blueleaf wrote:If you get a combined return series using weighted average return for each year, can't you then just take the stdev of the combined (portfolio) return series?
Yes.

The portfolio return each period will just be 0.75(stock return i) + 0.25(bond return i). You now have a return series for the portfolio, so you can calculate means return, standard deviation of returns, skewness, kurtosis, and so on. Go wild!
by magician
Sat Aug 09, 2014 11:14 am
Forum: Investing - Theory, News & General
Topic: The Worst Investment You Can Make: Buying a Home
Replies: 135
Views: 26603

Re: The Worst Investment You Can Make: Buying a Home

thx1138 wrote:A home that is your residence is not an investment, it is an expense plain and simple.
It is neither that plain nor that simple.
by magician
Fri Aug 01, 2014 3:45 pm
Forum: Investing - Theory, News & General
Topic: Dividend Strategy Ain't For Everyone
Replies: 149
Views: 17680

Re: Dividend Strategy Ain't For Everyone

Aptenodytes wrote:Magic doesn't work.
Does too!
by magician
Thu Jul 31, 2014 12:33 am
Forum: Investing - Theory, News & General
Topic: Expected Future Yield Curve
Replies: 22
Views: 2549

Re: Expected Future Yield Curve

What's the 2-year rate today?
by magician
Tue Jul 29, 2014 4:52 pm
Forum: Investing - Theory, News & General
Topic: bond duration and interest rate risk
Replies: 33
Views: 5156

Re: bond duration and interest rate risk

acegolfer wrote:
Chan_va wrote: See here.

"Unlike a noncallable bond, a callable security’s duration, or sensitivity to interest rate changes, decreases when rates fall and increases when rates rise. - See more at: http://www.investinginbonds.com/learnmo ... mhJk0.dpuf"
You are right. I thought we were talking about Macaulay duration, which is not affected by call provision.
Nor is modified duration.

Without saying so, they're talking about effective duration (which is affected by changes in cash flows).
by magician
Wed Jul 23, 2014 1:14 pm
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 89
Views: 8861

Re: Is there any downside to investing in bond futures?

Tanelorn wrote:Thank you magician for correcting my math on the futures pricing.

More generally, would it be right to say that a fully collateralized position of rolling front month treasury futures, say 10 year ones, would approximate have the same interest rate risks and returns as a treasury bond fund with the same duration as whatever is typical of the 10 year cheapest to deliver treasury bond?
Yup.

The downside would be all of the transaction costs every time you roll over the futures.
by magician
Wed Jul 23, 2014 10:27 am
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 89
Views: 8861

Re: Is there any downside to investing in bond futures?

The price is the future price, decreased by the future value of the coupons you won't receive. I covered that. The underlying is a theoretical, 20-years-to-maturity, 6% coupon, noncallable T-Bond. The futures price is S0 × (1+r)^T, where S0 is the (theoretical) price for the (theoretical) underlying bond. You sound like who knows Treasury futures. But there are still a few points you got wrong. 1. There's no 20-yr Treasury futures. The traded futures are 10yr, 5-yr, 2-yr and 30-yr "Ultra" futures. 2. The formula S0*(1+r)^T is a forward price formula. It works for futures, only if the underlying asset price is unaffected by the interest rate. 3. There's no theoretical 20-yr 6% T-bond selling today for $1022.15. 4. To be 100% accur...
by magician
Wed Jul 23, 2014 9:43 am
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 89
Views: 8861

Re: Is there any downside to investing in bond futures?

The price of a bond futures will be (surprise, surprise!) the future value of today's price on the bond, increased at the risk-free rate for the term of the futures contract. F0 = Future value of today's price increased at the Rf? What do you mean by future value of today's price? How do you know what that will be? Suppose that a 20-year Treasury Bond is selling today for $1,022.15, and the the 3-month risk-free rate is 0.5% (2.0% annually). Then the price of a 3-month futures contract on that T-Bond is $1,022.15 × 1.005 = $1,027.26. That's the price you'll pay (in 3 months) for that T-Bond. 2 points. 1. Then you should have stated "The price of a bond futures will be (surprise, surprise!) the future value of today's price on the bond...
by magician
Wed Jul 23, 2014 9:33 am
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 89
Views: 8861

Re: Is there any downside to investing in bond futures?

longinvest wrote:What happens if the bond defaults?
If you have the long position in a futures contract, you'll be buying a defaulted bond.

Just as if you'd owned the bond itself. No difference.

(So, you might consider buying a CDS as well . . . .)
by magician
Wed Jul 23, 2014 9:06 am
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 89
Views: 8861

Re: Is there any downside to investing in bond futures?

TomatoTomahto wrote:This has been interesting to read, but I'd be lying if I said that I understood most of it (magician, you got me the closest to understanding).
I'm glad to hear that; thanks.

The takeaway is: unless you're planning to take advantage of the leverage offered (and apart from the differing tax treatment), buying (i.e., taking the long position in) a bond futures contract is exactly the same as buying the underlying bond. You might as well buy the bond and be done with it.
by magician
Wed Jul 23, 2014 9:02 am
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 89
Views: 8861

Re: Is there any downside to investing in bond futures?

So here's a question for market timer, magician, or someone else who really understands these things: if you wanted exposure to a 2 year treasury and bought a 2 year future contract for delivery 2 years from now, is the price you would expect to pay now for that future be the notional of the contract discounted by the difference between the risk free rate and the interest rate paid on the 2 year note? To be more concrete, if risk free was 0.25% and a 2 year treasury paid 1% (both annualized), we would expect the PV of a $100 bond to be $100/(1+0.75%)^2 = $98.52 and hence that would be the future contract price? If so, we could expect to earn both the $1.48 difference between now and maturity by holding the future, as well as whatever we ea...
by magician
Wed Jul 23, 2014 8:43 am
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 89
Views: 8861

Re: Is there any downside to investing in bond futures?

acegolfer wrote:
magician wrote: The price of a bond futures will be (surprise, surprise!) the future value of today's price on the bond, increased at the risk-free rate for the term of the futures contract.
F0 = Future value of today's price increased at the Rf?

What do you mean by future value of today's price? How do you know what that will be?
Suppose that a 20-year Treasury Bond is selling today for $1,022.15, and the the 3-month risk-free rate is 0.5% (2.0% annually). Then the price of a 3-month futures contract on that T-Bond is $1,022.15 × 1.005 = $1,027.26. That's the price you'll pay (in 3 months) for that T-Bond.
by magician
Wed Jul 23, 2014 12:11 am
Forum: Investing - Theory, News & General
Topic: Is there any downside to investing in bond futures?
Replies: 89
Views: 8861

Re: Is there any downside to investing in bond futures?

Wow. Let's see if I can simplify things here for lee1026 : Taking the long position in bond futures is (nearly) identical to buying the underlying bond. Period. (Oh, sure, there are some minor complexities, but, in essence, they're (nearly) identical. I'll hit the complexities in a minute.) When you buy a bond, you own the bond today. When you take a long position in a bond futures contract, you don't own the bond today, but you have the same risk as if you did, and when the contract expires and you take delivery, you'll own the same bond as you would have had you bought it today. Same upside, same downside, same everything. Absolutely no difference. Period. The price of a bond futures will be (surprise, surprise!) the future value of today...
by magician
Tue Jul 22, 2014 9:24 am
Forum: Investing - Theory, News & General
Topic: Can it be wrong to be too risk averse?
Replies: 49
Views: 4535

Re: Can it be wrong to be too risk averse?

As a general rule, it's wrong to be too anything.
by magician
Mon Jul 21, 2014 9:07 am
Forum: Investing - Theory, News & General
Topic: What to do in a market correction
Replies: 32
Views: 4851

Re: What to do in a market correction

munemaker wrote:
magician wrote:
stlutz wrote:
What, exactly, is a market correction?
The traditional definition is a drop > 10% but <20% (which would be a "bear market"). The drop in 2011 was interesting because it was a "bear market" if you look at intraday prices but only a "correction" if you went by close prices. :moneybag
Why 10%? Why not 8%, or 12%, or 15%?

What about a 10% increase; is that a correction, too? Or is it an anticorrection?

How do we know that the market was "incorrect" before the "correction" but not afterward?
You are reading too much into this.
No; I just think that it's a stupid term.
by magician
Mon Jul 21, 2014 12:43 am
Forum: Investing - Theory, News & General
Topic: What to do in a market correction
Replies: 32
Views: 4851

Re: What to do in a market correction

stlutz wrote:
What, exactly, is a market correction?
The traditional definition is a drop > 10% but <20% (which would be a "bear market"). The drop in 2011 was interesting because it was a "bear market" if you look at intraday prices but only a "correction" if you went by close prices. :moneybag
Why 10%? Why not 8%, or 12%, or 15%?

What about a 10% increase; is that a correction, too? Or is it an anticorrection?

How do we know that the market was "incorrect" before the "correction" but not afterward?
by magician
Mon Jul 21, 2014 12:10 am
Forum: Investing - Theory, News & General
Topic: What to do in a market correction
Replies: 32
Views: 4851

Re: What to do in a market correction

What, exactly, is a market correction?
by magician
Mon Jul 21, 2014 12:05 am
Forum: Investing - Theory, News & General
Topic: Momentum Investing ?
Replies: 55
Views: 8018

Re: Momentum Investing ?

pkcrafter wrote:bs010101, you are right, of course, but some Bogleheads, perhaps the majority, won't chase anything. Furthermore, the opposite of momentum is reversion to the mean.

Paul
The problem with reversion to the mean is naïvely believing that you know what the mean is.
by magician
Fri Jul 18, 2014 6:59 pm
Forum: Investing - Theory, News & General
Topic: Very high interest rate in other countries? How come?
Replies: 44
Views: 5305

Re: Very high interest rate in other countries? How come?

You can access higher interest rates in other countries and avoid the risk of exchange controls through the currency futures markets, and you can now access the futures markets though Schwab (since it has acquired OptionsXpress). You would need to roll over the futures contracts 4 times a year. The bid-ask spread can be 0.01% for some developed currencies and 0.1% for some emerging market ones. Futures contracts are priced to incorporate interest rate differentials, so the futures contracts on high-yielding currencies trade at a discount to spot levels. Futures brokerages allow you to use a lot of leverage, but you can decide not to let the notional value of your futures positions exceed the equity in your account. Profits and losses on fu...
by magician
Fri Jul 18, 2014 6:58 pm
Forum: Investing - Theory, News & General
Topic: Very high interest rate in other countries? How come?
Replies: 44
Views: 5305

Re: Very high interest rate in other countries? How come?

Beliavsky wrote:My reading of the academic research is that higher interest rate currencies tend to depreciate against lower rate ones, but by less than the interest rate differential. So it has been profitable to own higher rate currencies, but the profit has been less than the nominal rate spread.
Hence: carry trade.

Which works well . . . until it doesn't. And when it doesn't, it doesn't in spades, disastrously.
by magician
Mon Jul 14, 2014 2:30 pm
Forum: Investing - Theory, News & General
Topic: How do I model 20 yr Treasury portfolio impact?
Replies: 37
Views: 4471

Re: How do I model 20 yr Treasury portfolio impact?

Call_Me_Op wrote:
magician wrote:
Call_Me_Op wrote:Duration is the first-derivative of the price versus yield curve.
Not to put too fine a point on it, but (modified) duration is not the first derivative of the price with respect to the yield; dollar duration is the first derivative of price with respect to yield.
I think you may be putting too fine a point on it. I did not specify dollar price - my statement could as easily been based upon factional price.
Price change is not the same as percentage price change, no matter what you specify.
by magician
Sun Jul 13, 2014 7:39 pm
Forum: Investing - Theory, News & General
Topic: How do I model 20 yr Treasury portfolio impact?
Replies: 37
Views: 4471

Re: How do I model 20 yr Treasury portfolio impact?

acegolfer wrote:Image
What I hate about this graph is that at left end of it suggests that as the yield approaches zero (percent), the price goes to infinity, which is silly. But finance people always draw the graph like this.
by magician
Sun Jul 13, 2014 7:37 pm
Forum: Investing - Theory, News & General
Topic: How do I model 20 yr Treasury portfolio impact?
Replies: 37
Views: 4471

Re: How do I model 20 yr Treasury portfolio impact?

Call_Me_Op wrote:Duration is the first-derivative of the price versus yield curve.
Not to put too fine a point on it, but (modified) duration is not the first derivative of the price with respect to the yield; dollar duration is the first derivative of price with respect to yield.
by magician
Mon Jul 07, 2014 9:12 am
Forum: Investing - Theory, News & General
Topic: Risk Adjusted Return?
Replies: 61
Views: 7141

Re: Risk Adjusted Return?

2) If you nonetheless feel you must quantify, use a better measure of risk. There are numerous multi-factor models and models which tie returns to macro-economic factors. Some of the multi-factor models do a better job of explaining past returns than stdev (and it's friend, CAPM). The Fama-French three factor model is rather popular in these parts. And how, exactly, do you use the betas in Fama-French to quantify risk? If one security has a market beta of 0.8, a size beta of 1.2 and a value beta of 1.3, while another has, respectively, 1.2, 0.5, and 1.5, which one is riskier? Why? (As a side note, Fama-French is no less dependent on a security's standard deviation of returns than is CAPM; if σ is CAPM's friend, it's equally Fama-French's f...
by magician
Sun Jul 06, 2014 11:51 pm
Forum: Investing - Theory, News & General
Topic: Risk Adjusted Return?
Replies: 61
Views: 7141

Re: Risk Adjusted Return?

2) If you nonetheless feel you must quantify, use a better measure of risk. There are numerous multi-factor models and models which tie returns to macro-economic factors. Some of the multi-factor models do a better job of explaining past returns than stdev (and it's friend, CAPM). The Fama-French three factor model is rather popular in these parts. And how, exactly, do you use the betas in Fama-French to quantify risk? If one security has a market beta of 0.8, a size beta of 1.2 and a value beta of 1.3, while another has, respectively, 1.2, 0.5, and 1.5, which one is riskier? Why? (As a side note, Fama-French is no less dependent on a security's standard deviation of returns than is CAPM; if σ is CAPM's friend, it's equally Fama-French's f...
by magician
Thu Jul 03, 2014 5:34 pm
Forum: Investing - Theory, News & General
Topic: Why is the market portfolio a tangency portfolio?
Replies: 35
Views: 21464

Re: Why is the market portfolio a tangency portfolio?

The tangency portfolio is called the market portfolio, but there is no reason to believe that it is the portfolio comprising all possible investments in proportion to their market weights.

Quite a few people seem to think that it is, but nobody has ever produced a convincing argument (that I've seen) that it must be so. I, for one, don't believe it.
by magician
Tue Jul 01, 2014 4:30 pm
Forum: Investing - Theory, News & General
Topic: Bond yield =/= guaranteed return
Replies: 36
Views: 4974

Re: Bond yield =/= guaranteed return

BackInTheBlack wrote:
acegolfer wrote:1. Can a T-bill be called a zero-coupon bond?
1) Since T-bills technically are zeroes . . . .
Why "technically"?
by magician
Fri Jun 27, 2014 4:27 pm
Forum: Investing - Theory, News & General
Topic: Bond yield =/= guaranteed return
Replies: 36
Views: 4974

Re: Bond yield =/= guaranteed return

Langkawi wrote:While T-Bills technically share the characteristics of zero-coupon bonds, I've never heard a knowledgeable person refer to them as such.
I've referred to T-Bills as zero-coupon bonds. Frequently.

Whether or not I qualify as a knowledgeable person is another question entirely, however.
by magician
Sun May 04, 2014 11:52 pm
Forum: Investing - Theory, News & General
Topic: Options Trading: shooting down the "iron condor"
Replies: 19
Views: 4537

Re: Options Trading: shooting down the "iron condor"

Beverage wrote:If you want to learn about options you should read Options As A Strategic Investment. But briefly:

- Options trading is a zero-sum game
Because of trading costs, options trading is a less-than-zero-sum game.
by magician
Sun Apr 27, 2014 1:50 am
Forum: Investing - Theory, News & General
Topic: Callable bond duration
Replies: 12
Views: 3923

Re: Callable bond duration

packer16 wrote:A useful metric is yield to worse as this is lowest return you will get (assuming the firm does not go BK) and your yield to maturity is highest yield.
Again, it isn't necessarily true that YTM will be higher than all of the YTCs. It usually is, but it needn't necessarily be.
by magician
Sun Apr 27, 2014 1:48 am
Forum: Investing - Theory, News & General
Topic: Callable bond duration
Replies: 12
Views: 3923

Re: Callable bond duration

grabiner wrote:Duration is defined mathematically as the ratio of price change to interest-rate change (for mathematicians, it is the negative of the derivative of price with respect to interest rate).
Actually, duration (specifically, effective duration) is defined mathematically as the ratio of the percentage price change to the interest-rate (i.e., yield-to-maturity) change, not the ratio of the price change to the YTM change. For mathematicians, it is the negative of the derivative of the natural logarithm of price (ln(price)) with respect to YTM, not the negative of the derivative of the price with respect to YTM.
by magician
Sun Apr 27, 2014 1:30 am
Forum: Investing - Theory, News & General
Topic: Callable bond duration
Replies: 12
Views: 3923

Re: Callable bond duration

packer16 wrote:If your bond looks it is going to be called (based upon coupon being higher than re-fi rate), they will trade at yield to worst. You need to look at the bond specifics but bonds typically have multiple call dates with higher prices for earlier dates (this provides some protection to the bond holder providing a minimum yield (the yield to worst).
It will trade at yield to call (YTC), which may or may not be the yield to worst. For the yield to worst you need to consider the YTCs for each call provision (as you say, there are typically several), as well as the YTM.
by magician
Mon Apr 21, 2014 9:24 am
Forum: Investing - Theory, News & General
Topic: Monte Carlo Software
Replies: 13
Views: 2507

Re: Monte Carlo Software

I use Excel to run Monte Carlo simulations only about all the time.

The software I prefer is @Risk by Palisade. You can download a trial copy here.

I like @Risk for two primary reasons:
  • It's easy to learn
  • The functions work as if they were standard Excel functions
by magician
Sat Jan 25, 2014 11:39 pm
Forum: Investing - Theory, News & General
Topic: Harry Markowitz meets the Efficient Frontier - and blinks
Replies: 4
Views: 1376

Re: Harry Markowitz meets the Efficient Frontier - and blink

Don't read too much into that quote.

When I interviewed Dr. Markowitz, I asked him about this story. He said that he had a choice of two investments: stocks and bonds. Thus, every combination of those two is on the minimum variance frontier, and all of those at or above the global minimum variance portfolio is on the efficient frontier. He did, in fact, choose an efficient portfolio.
by magician
Wed Jan 22, 2014 5:19 pm
Forum: Investing - Theory, News & General
Topic: Riding the Yield Curve
Replies: 52
Views: 6019

Re: Riding the Yield Curve

I don't believe preferred habitat is anywhere close to being as popular as the expectations theory. I don't know about its popularity, but it seems plausible. Insurance companies, for example (which are huge fixed income investors), like to match their assets and liabilities (maturity and duration, if possible); they would definitely have preferred maturities, and would demand extra yield for longer or shorter maturities than their preferred (because either of those will increase their risk). Expectations is more popular because it is more general and explains things well. I'm not sure that it is more general, but it does explain any yield curve shape. The preferred habitat theory may be viewed as a part of the expectations theory. For exa...
by magician
Wed Jan 22, 2014 3:53 pm
Forum: Investing - Theory, News & General
Topic: BRK go to for weird risks - NCAA bracket bet
Replies: 16
Views: 2218

Re: BRK go to for weird risks - NCAA bracket bet

Wagnerjb wrote:
lazyday wrote:odds of picking every winner correctly in a 64-team bracket are less than 1 in 9 quintillion....with some basketball knowledge, that only improves to about 1 in 128 billion, he said in a video posted on YouTube
Do you really need any basketball knowledge? Just pick based on the ranking of the teams. Pick the favorites all the way through. That gives you the best odds.
It probably doesn't give you the best odds, but it gives you the best defense when you miss a pick.
by magician
Wed Jan 22, 2014 3:22 pm
Forum: Investing - Theory, News & General
Topic: Riding the Yield Curve
Replies: 52
Views: 6019

Re: Riding the Yield Curve

richard wrote:I don't believe preferred habitat is anywhere close to being as popular as the expectations theory.
I don't know about its popularity, but it seems plausible. Insurance companies, for example (which are huge fixed income investors), like to match their assets and liabilities (maturity and duration, if possible); they would definitely have preferred maturities, and would demand extra yield for longer or shorter maturities than their preferred (because either of those will increase their risk).