Research : Closed Form Yield Calculation

In this essay I began by briefly reviewing the previous month’s effort, Resarch : April, 2010, FixedReset Slump:

In the appendix to the May, 2010, edition, we looked at the behaviour of FixedResets during their Slump Period from 2010-3-26 to 2010-4-29 and concluded that issues of this type are trading on the basis of Current Yield – that is, the current dividend divided by the price. There appears to be an adjustment to valuation based on the total expected capital loss.

This is despite the fact that this is a completely insane methodology. It ignores:

  • • The rate (total/time) of the expected capital loss should the issue be called (virtually a certainty for most extant FixedResets)
  • • The change in dividend should the issue not be called and the dividend reset for the ensuing five years to the defined spread about Canadas
  • • The proximity of the ex-Dividend Date

This led to a fair bit of high-school algebra that derived a closed-form approximation to the yield of a perpetual preferred share with a constant dividend rate to perpetuity; as well as an approximation for the yield of a maturing instrument.

A missing part of the theory was derived in May, 2011, using the First Exponential Approximation, and that derivation is appended to the linked document.

Look for the research link!

2 Responses to “Research : Closed Form Yield Calculation”

  1. ratchetrick says:

    In an attempt to inject a little humour into an otherwise crappy kind of investing day . . . and to embrace the description of what a pref investor really is, as given by the host of this fine blog (and enthusiastically seconded by at least one assiduous reader), . . . may I respectfully offer this picture I found online, as a possible alternative to the inevitable bomb blast scene to be surely presented shortly!

    https://i5.walmartimages.ca/images/Enlarge/500/828/6000201500828.jpg

  2. […] essay also continues the mathematical work embodied in the June 2010 Prefletter essay “Closed Form Yield Calculation”, using the Exponential Approximation as a simplifying […]

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