FIN 300 Bonds Part 2 Ch 8 - FIN 300 Fundamentals of Finance Bonds Pt.2 Chapter 8 FIN 300 Bonds Pt 2 1 Price vs Yield Back to this chart Bond Trades at

FIN 300 Bonds Part 2 Ch 8 - FIN 300 Fundamentals of Finance...

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FIN 300Fundamentals of FinanceBonds Pt.2Chapter 81FIN 300 - Bonds Pt. 2
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Price vs. YieldFIN 300 - Bonds Pt. 12Bond Trades at:Price:Coupon Rate vs. YTMPremiumPrice > Par (or, Face)Coupon Rate > YTMParPrice = Par (or, Face)Coupon Rate = YTMDiscountPrice < Par (or, Face)Coupon Rate < YTMBack to this chart………
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Price vs. Yield The price of a bond is just the present value (PV)The yield (YTM) of a bond is, in effect, just the discount rateSo, if the yield (discount rate) goes up, the price (PV) goes downAnd, if the yield goes down, the price goes upPrice and yield move in opposite directionsNote: This applies to all bonds – not just coupon-paying bonds!FIN 300 - Bonds Pt. 23
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Maturity and Price ChangesNow, let’s revisit our previous example of the coupon-payer over 3 different YTM’s10-year, semiannual, 10% coupon, $1000 face, and YTM=9%, 10%, and 11%FIN 300 - Bonds Pt. 24PriceYield$1065.049%$100010%$940.2511%
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Maturity and Price ChangesNow, let’s re-do the entire example However, the bond’s maturity is now 5 years, instead of 10 yearsThe only change is that the N=10 (5yr. x 2 semi-annual coupon periods/yr.) – all other inputs stay the sameFIN 300 - Bonds Pt. 25
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Maturity and Price ChangesFIN 300 - Bonds Pt. 26+ = $962.31+ = $1000+ = $1039.56
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Maturity and Price ChangesYieldPrice (10-year Maturity)Price (5-year Maturity)9%$1065.04$1039.5610%$1000$100011%$940.25$962.31FIN 300 - Bonds Pt. 27Semi-annual, 10% coupon, $1000 face:What does this say about the risk of owning longer maturity bonds?Note the wider price variation at the longer maturity!
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Maturity and Bond PriceAll else being equalLonger maturity bonds will exhibit a greater change in price for the same change in YTM!
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