Bond or fixed income securities and stock are two widely used investment vehicles. Thus, they deserve a thorough discussion. Before touching upon bond or stock valuation, we have to discuss interest rate and its related concepts, such as Annual Percentage Rate (APR), Effective Annual Rate (EAR), compounding frequency, how to convert one effective rate to another one, the term structure of interest rate, how to estimate the selling price of a regular bond, how to use the so-called discount dividend model to estimate the price of a stock, and so on. In particular, this chapter will cover the following topics:
Introduction to interest rates
Conversion between various effective rates, APR
The term structure of interest rates
Bond evaluation and YTM
Credit rating versus default spread
Definition of duration and modified duration
Stock evaluation, total returns, capital gain yield, and dividend yield
A new data type – dictionary