Its related to Beta,,,can bonds have beta ...?

Question

Can bonds have beta...if yes how is it calculated any special precautions to be taken while calculating beta for bonds...?

Answer 1

bkoo869:

You need to retake your MBA course in investments. 1. The beta is nothing more than the cov(asset,market)/v(market). There is no restriction on asset. In fact, the CAPM is the global mean-variance efficient potfolio, which includes optimal weights of EVERY asset. Bill Sharpe never restriced the math to include only equities. Consequently, ANY AND ALL assets have a beta. 2. Duration is not a measure of time. 3. Duration is an EXACT measure of volatility locally, but you are right about beta being an estimate.

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To answer the question: any asset has a beta. It is the coefficient from regression the asset returns on the returns of the market portfolio. However, since the market portfolio only exists in CAPM theory, practitioners often use a diversified stock index as a proxy.

The only precaution that is needed is in the interpretation. The mechanics of the calculation are, well, mechanical.

The reason that you never see factor models used to price bonds is that DCF works INFINITELY better.

Answer 2

Beta Bonds

Answer 3

No, bonds don't have beta; only equities do. Beta is the correlation of returns on the equity to returns on the market as a whole (usually measured by the S&P 500).

The market itself has a beta of 1, so if a stock has a beta of 2, then if the stock market goes up 1%, that stock usually goes up 2%. Beta is a statistical measure, so there's no guarantee that the stock will actually move that way, but in general, the higher the beta, the higher the volatility of the stock price (the faster it moves up and down).

Bonds do show correlation with the stock market, but calculating beta would make no sense, because they're not part of the market. Instead, they have something analogous, duration, which is hopefully what you're looking for.

Duration is, roughly speaking, the "time" of the bond. It measures the interest rate sensitivity of the bond, since interest rates have the largest effect on bond prices. It's measured in years, or months, and is essentially a weighted-average of the bond's payments, or cash flows.

For example, if a bond has a duration of 1 year, then the average of its payments is approximately 1 year away, so that if the interest rate rises by 1%, the price of the bond is likely to fall by about 1% (not exactly, but close enough). If the duration is 2 years, then price is likely to fall about 2%.

The easiest bonds to calculate duration for are zero-coupon bonds. Since the entire payment is made at bond expiration, then the duration is equal to the time to maturity. A zero-coupon bond that expires in one year has a duration of 1 year.

Duration, like beta, is just a rough measure. It is used in calculating theoretical prices, and is not such a good tool for calculating prices in the real world. A bond with 7 duration will move much more than a bond with 1 duration, but only rarely exactly 7 times as much.

I'm just giving you a general overview. You can type in "bond duration" in any search engine and find the exact formula. As for special precautions, people don't actually use duration anymore, but rather modified duration or Macaulay duration, which are just slightly adjusted versions of bond duration, but any bond website will explain that.

Answer 4

Bonds don't have beta because the bond rate is fixed to the risk free nature of the bond. This means bonds are secured against the assets of the company. The government bonds or soverign debt has the governments backing of promise to pay back. This kind of security is not there for the stocks which are unsecured instruments. Moreover t bond rates are used to meassure the systmatic risk and adequate compensation is given to it by way of fixed rates of return. Stocks do have both systematic and non systematic or company specific risks. It is this non systematic risk which is used to fix the risk premium needed for the stock above the systematic risk. So stocks need beta where as secured bonds don't need beta. In otherwords beta decides how much risk premium should be attached to a stock on how much more or less risk it takes with the market return. Bonds don't have to worry about it since it is secured from default and the rates are consistent based on systematic risk which is inflation rate in the economy. Since this is the base rate there is low amount of fluctuation for bonds.

Answer 5

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