Bid/Ask Scenario

Bid/Ask  explains everything sometimes authors are referring Bid as Buyers than that is from Perspective of Bank or Stock Exchange example.

If there are any errors please contribute and help me fix it. :)
That's all 

Are You stupid - check here! Why U need YTM or IRR ?

Why U need YTM or IRR ?  and please convert a investment to Coupons or vice versa

Talking about Yield of a Bond and IRR are same but IRR is usually calcuated on Bond simple one i guess and the Yield is used when there is a bond with constant payments like Annuinity or maybe pert..not sure

So lets take an example.

One imp. Point replace the values of initial investment with 900 and we will learn why not to use formulas and simplification rather process everything in end to be more accurate but it makes things confusing so start with 800

Suppose  interset is .11111  so u need to learn where are u loosing money and it will need a new post .
Simple Investment
800----------*------------*---------------*---------------*------------*----------*
                    1                  2                        3                       4                5                6

for 1yr -----820
            800*(1,0125)
---2 yr ----------------840,5
                          800*(1,0125)^2
----------------------------------------861,5
------------------------------------------------------883,05
-------------------------------------------------------------------905,126
---------------------------------------------------------------------------------927,75

Bond with Coupon conversion
800----------20-----------20---------------20--------------20----------20---------20
                     1                    2                        3                       4                5                6
-for 1 yr----820

-----2 yr ----20---------820 + 20*(1.025) = 840.5 - Present value of 20 that YOu got 1 yr before so now they are 20.5

----------
-----3 yr with coupon-----------------------820 + 20*(1,025) + 20(1,025)^2 = 861.5



Above is a simple bond that shows if u have it for One , two or three or how many yrs u want .
If for Four yrs u get 883,05 in the end.

How do you know what is the Rate there well that's what IRR is for  .When bonds its YTM

Q- Invest X and get $10 every yr. and in end of 6 yrs get 800 back.

P= C/R
R= 10/800  = ,0125
Wrong way to calculate in Coupon bonds . WE USED  800 specifically to show that wrong method and that is why we need IRR in coupons 
Calculated the R here again

Now how to Equate this with coupons and how much you get every year must be the same  and you can see that above .

IRR and YTM thing well.

Everything is done now what is IRR or YTM here for then ?

Well you wanna sell the bond for what price that gives 20 per yr and 800 in end.
so u use YTM and excel to get that

Selling Price=BW(0,0125;6;20;800) = -857,46
Rate =ZINS(6;20;-857,46;800) = ,0125 or 1,25%

yr = 6
COUPON = 20
800 u get in end.
You can get rate from selling price here by 

If u sell it at 800 u are stupid sell it at 857,46
that's all !




Simpliest way to do this .

How I understood EAR & apr

We know

1 + EAR =  ( 1+ APR/x )^x

Example:- 100 bond 5% coupon seminannual payments . Current price 957.35

Compute Rate  =ZINS(10;25;-957,35;1000) = 3%

3%

So APR = 6%
EAR = 6.09%

How ?

APR is computed like Simple interest so semiannualy in this ques.
Both APR and EAR are expressed in annual terma´s


957.35(1.03)(1.03) = 1015.652615

EAR
957.35(1 + ear) = 1015.652615
957.35 + 957.35*ear = 1015.652615
 957.35*ear = 1015.652615 - 957.35
ear  = 58,302615/957.35

ear = 0,0609

Just the compounded % of how much u earned ! 

= HOW MUCH U EARNED PER YR / INITIAL MONEY

Now see the first equation and see this 

957.35(1.03)^2= 1015.652615

(1.03)^2= 1015.652615/957.35      =  1+rate = (1 + ear)1/2   /* This is the imp. point to understand because compounded semianually*/

So half of the ear return  is the apr return per 6 months.

Thats all folks :)



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