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Discount Bond Dynamics
This type of bond is usually offered at a value that is less than its face value. Discount bonds might also trade in the secondary market at a value that is less than its par value. A bond that is sold at a price that is significantly lower than its face value is often considered a deep-discount bond. The less value is usually 20% or more. Most bonds are often issued with one thousand dollars face values. The investor will be paid this amount when the bond matures. However, bonds can be sold in the secondary market before maturity but at a less face value. These bonds are what we call discount bonds.
Short rate models
A short rate model uses mathematical and statistics concepts to evaluate interest rate derivatives. It is used to explain how interest rates evolve. A short rate model determines the changes in a short rate r(t) within a particular period. In this model, the spot rate at a given time is the stochastic state variable. As a result, we can say that the short rate is the annual interest (compounded continuously) at which an entity can borrow money for an infinitesimally short time.
Bond Volatility Structure
Bond volatility uses statistics to measure return dispersion for a bond. A bond with the highest volatility possesses the highest risks. Standard deviation and variance are some of the methods that can be used to measure volatility. Volatility can swing either way in the securities markets. Bond volatility can be calculated by dividing the percentage changes in price by that of yield to maturity.
This is exactly as it sounds; a fixed amount of money that is tied to a credit or loan that must be paid together with the principal. It is the most common type of interest for money borrowers, as it is easy to understand and simple to calculate. It is also stable. Both the lender and the borrower know the exact obligations tied to a credit or loan account.
Interest rates sometimes fluctuate and this is precisely what happens with variable interest rates. Variable interests are usually pegged to the ongoing movements of base interest rates. In tougher economic times, the base interest rates can decline and as a result, borrowers with loans or credits tied to variable rates will benefit. On the other hand, if the base interest rates go up, the borrower with a variable rate may have to pay more interest.