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ganalon
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I am a long-term investor who has been investing since the age of 12. I like low-cost index funds and ETFs and often use options to hedge and/or smooth out my returns. I am fascinated by investing and investing history. I have taken graduate classes in CAPM, forex, and bonds. I am a bit of quant... More
My company:
Sigma1 Software
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Sigma1 Financial
  • Quick First Post
    For some reason I was thinking about bond current yield, yield to maturity (YTM), and duration while in the shower.   It occurred to me that YTM and duration give a general idea about a bond portfolio they are still only provide a limited perspective.

    Consider portfolios A and B below invested in risk-free bonds/risk-free cash.

    Portfolio A is has one investment, a zero-coupon bond valued at $100 that pays $110 in 365 days.  It has a 10% YTM and a 1-year duration.

    Portfolio B has two investments.  The first is zero-coupon bond valued at $50 which pays $60.50 in exactly 2 years.  The second is $50 in cash currently paying 10% APR.    Portfolio B also sports a 10% YTM and a 1-year duration.

    In terms of YTM and duration, A and B are identical.   However I suspect that one is "better" than the other for a 1-year vs. 2-year horizon.  "A" gives a precise return at the end of 1 year.  "B" offers an overall lower re-investment risk over a 2-year period.

    Without cracking open my old "Investments" textbook, I suspect the intuitive difference I see goes beyond convexity.  But I can't put my finger on what that something might be.  

    Any takers?



    Disclosure: N/A
    Tags: bonds, duration, YTM
    Apr 08 11:57 PM | Link | Comment!
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