FIN 300Fundamentals of FinanceBonds Pt.2Chapter 81FIN 300 - Bonds Pt. 2
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………
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 rate•So, if the yield (discount rate) goes up, the price (PV) goes down•And, if the yield goes down, the price goes up•Price and yield move in opposite directions–Note: This applies to all bonds – not just coupon-paying bonds!FIN 300 - Bonds Pt. 23
Maturity and Price Changes•Now, let’s revisit our previous example of the coupon-payer over 3 different YTM’s–10-year, semiannual, 10% coupon, $1000 face, and YTM=9%, 10%, and 11%FIN 300 - Bonds Pt. 24PriceYield$1065.049%$100010%$940.2511%
Maturity and Price Changes•Now, let’s re-do the entire example •However, the bond’s maturity is now 5 years, instead of 10 years–The 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
Maturity and Price ChangesFIN 300 - Bonds Pt. 26+ = $962.31+ = $1000+ = $1039.56
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!
Maturity and Bond Price•All else being equal–Longer maturity bonds will exhibit a greater change in price for the same change in YTM!