FIN423 Class 18: Yield to Maturity, Holding Period Return & MacAulay Duration | BRAC University

https://drive.google.com/drive/folder... Course materials for the playlist Welcome back to FIN423: Security Analysis and Portfolio Management at BRAC Business School! In Class 18, we shift our focus entirely to Fixed Income Securities, specifically Bond Valuation and Interest Rate Risk. Understanding how a bond is priced and how its return fluctuates before maturity is essential for any financial analyst or portfolio manager. We break down the three sources of a bond's return: Coupon Payments, Reinvestment Income, and Capital Gains/Losses. Through an extensive Excel math workshop, we demonstrate how Yield to Maturity (YTM) is only an expected return, whereas the true Holding Period Return (HPR) depends on the reinvestment rate and the price at which the bond is sold. Finally, we introduce Duration as the primary measure of a bond's interest rate risk. You will learn the difference between MacAulay Duration, Modified Duration, and Dollar Duration (Price Value of a Basis Point). 📌 In This Video, We Cover: The 3 Sources of Bond Returns: * Coupon Payments Reinvestment Income (Interest earned on reinvested coupons) Capital Gains/Losses (Price changes when selling before maturity) Yield to Maturity (YTM) vs. Horizon Yield: Why YTM assumes you hold the bond to maturity and reinvest all coupons at the exact same YTM rate. Math Workshop - Bond Returns in Excel: * Using the =PRICE() function. Calculating Holding Period Return (HPR) and annualized Horizon Yield (CAGR). Demonstrating how changing interest rates (e.g., rates rising to 11.4% or falling to 9.4%) create a push-pull effect between Reinvestment Risk and Price Risk. Understanding Duration: * MacAulay Duration: The weighted average time until all cash flows are received. It represents the "balance point" where Reinvestment Risk and Price Risk perfectly offset each other. Modified Duration: Measures the approximate percentage change in a bond's price for a 100 basis point (1%) change in interest rates. Dollar Duration (Money Duration): The absolute dollar change in price for a 100 bps change in rates. Price Value of a Basis Point (PVBP): The dollar change in price for a 1 basis point (0.01%) change in rates. Bond Convexity: Why the relationship between bond prices and interest rates is a curve, not a straight line, making Modified Duration only an approximation for small rate changes.