Bond Math
What drives the value of a bond, and therefore, how would an individual price one? These are two of the primary questions the HBS Bond Math tutorial explores, and answers very effectively through its use of multimedia elements such as animation, audio, and graphics. This tutorial covers topics including bond valuation and the impact of changes in market interest rates, whether or not bonds will respond equally to those changes, or risk assessments of a bond portfolio, adding layers of complexity for those trying to learn these concepts.
To help MBA students better understand the fundamentals of Bond Math, Professors Peter Tufano and Joshua Coval proposed the idea of creating a tutorial on this topic. In this tutorial, students are presented with several chapters with topics ranging from 'An Introduction to Bonds' to 'Sources of Risk' to 'Convexity.' The chapters are comprised primarily of text, which explains each concept in clear and succinct form. However, since many of these concepts are difficult to learn, the text has been enhanced through the addition of graphics, animation, audio, and interactive problems where appropriate.
This tutorial, as with all HBS tutorials, can be printed out if students want to mark-up the content with their own notes and highlights. As students move through each concept, they are presented with a series of brief, one or two question problems which test their understanding of the information as they are learning it. In doing so, they receive helpful and immediate feedback. This scenario resembles, as much as possible, a one-on-one learning session between a student and a tutor. If students do not fully understand a particular topic, which should be reinforced by their answering a problem incorrectly, they can easily navigate back to any part of the tutorial for a review of that specific topic. A custom designed interactive tool (see sample screen shot below) was created to illustrate how variables, such as coupon rate, payments per year, years to maturity, and discount rate affect the value of a bond.
Whether students are new to the concepts of Bond Math or already knowledgeable in this area, the tutorial serves both audiences well by presenting useful information in a clear, easy-to-follow format. Hosting the material on-line provides students with more flexibility when preparing for upcoming class discussions. With several case studies to prepare each night, students have a good deal of material to review in a relatively limited period of time. The converse is also true. Valuable class time will be wasted if too much of that time is used covering the basics. This tutorial helps to achieve one of the simple goals of courseware development at HBS - If students are better prepared for class, then professors are better able to create a more effective environment for learning.
Professor Coval offers a final observation. He states, 'One of the main reasons that this tutorial is valuable is that its applets help present dynamics that are difficult to convey on a chalkboard -- dynamics that are important for understanding how fundamentals drive bond values and influence bond characteristics such as duration or convexity.'
