CCM Debt Securities cheat sheet

Debt Securities

• Bond price equals the present value of all future coupon payments plus principal, discounted at the yield to maturity (YTM); price and yield move inversely.

• Current yield = annual coupon ÷ current market price; it ignores capital gain or loss and therefore differs from YTM whenever price ≠ par.

• YTM solves P = Σ C/(1+y)^t + F/(1+y)^n; it assumes all coupons reinvested at y, so realized return diverges if reinvestment rates change.

• Accrued interest = coupon rate × days since last coupon ÷ days in coupon period × par; the buyer pays clean price plus accrued interest (dirty price).

• Duration (Macaulay) = weighted average time to cash flows; modified duration = Macaulay duration ÷ (1 + y/m), and ΔP/P ≈ −modified duration × Δy.

• Convexity adjustment: ΔP/P ≈ −D_mod × Δy + ½ × convexity × (Δy)^2; positive convexity makes price gains exceed losses for equal yield moves.

• Investment-grade ratings are BBB−/Baa3 and above; below that (BB+/Ba1 and lower) is high yield, where spread compensates for default and recovery risk.

• Callable bonds cap upside when yields fall (negative convexity to the issuer); putable bonds give the holder the right to sell back at a set price, supporting a price floor.

• Seniority waterfall: secured debt, then senior unsecured, then subordinated, then preferred/equity; recovery values fall as you move down the capital structure.