Identification of Factors of Influence upon the Cost of Fixed Coupon Securities

Hlotov Yevhen O. () and Cherevatenko Volodymyr A. ()
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Hlotov Yevhen O.: Kharkiv Institute of Finance of the Ukrainian State University of Finance and International Trade
Cherevatenko Volodymyr A.: Kharkiv Institute of Finance of the Ukrainian State University of Finance and International Trade

Business Inform, 2014, issue 1, 92_97

Abstract: The article studies fixed coupon securities (bonds). It provides a calculation of the cash flow, generated by fixed coupon securities, with enclosed discounted face value of securities. It analyses time indicator - average weighted duration of payments, which characterises sensitivity of the price of securities to changes of interest rates in the market. It proves availability of two groups of interconnections between the cost of a bond, coupon rate, market rate (rate of return) and term of its payment. The first group of interconnections reflects interconnections between the cost of a bond, coupon rate and market rate (rate of return). The second group characterises connection between the bond cost and term of its payment. The authors study the average weighted duration of payments. It plays an important role in analysis of long-term securities with fixed income. To simplify calculations it was accepted that the coupon payment is done once a year. The article offers a formula for identifying inaccuracy of the bond price depending on the expected change of profitability on payment. Analysing duration properties the article identifies shortcomings inherent in this indicator. Taking into account the average weighted duration of payments the article recommends a formula, as more efficient, for identification of the future bond price depending on change of profitability. The conducted studies are a theoretical ground for development of models of management of fixed income securities portfolios. The obtained scientific results could be used in the educational process both in colleges and specialised trainings of securities specialists. The scientific results could be used for developing information technologies when identifying cost of securities (fixed coupon bonds).

Keywords: cash flow; average weighted duration of payments; current cost; annual rate; market rate; term of repayment; payment period; face value; number of coupon payments (search for similar items in EconPapers)
Date: 2014
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