Required yield: the interest rate that an investor wants from investing in a bond.

Determined by investigating the yields offered on comparable (option-free, same

credit quality, same maturity) bonds in the market.

Three yield measures are commonly cited by market participants to measure the
potential return from investing in a bond
1. CURRENT YIELD: annual dollar coupon interest / price. Gives no
consideration to the capital gain that the investor will realize when the bond
matures
2. YIELD-TO-MATURITY: yield that will make the PV of the cashflows equal to
the price assuming that we hold the bond until maturity. It also considers
interest on interest.

Duration: measure of the approximate sensitivity of a bond’s value to rate

changes. More specifically, it is the approximate percentage change in value for a
100 basis point change in rates.
Approximate % price change = - duration * y
Duration is only a good approximation of the percentage change in price for small
changes in yield because it is just a first order (linear) approximation.

Convexity : helps approximate the change in price that is not explained by

duration.