BOND LECTURE 1.pptx - Bond Market Principles What is Bond Key Variables of Bond Pricing:a The maturity b The coupon rate c Market rate of interest rate

BOND LECTURE 1.pptx - Bond Market Principles What is Bond...

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Bond Market Principles What is Bond? Key Variables of Bond Pricing:- a. The maturity b. The coupon rate c. Market rate of interest rate Duration – Bond’s Price sensitivity to changes interest rate Convexity – another measure of bond price sensitivity.
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The Effect of Time on Price Movement Bond Prices change over time, due to the passage of time, even if interest rates do not change at all. 1. A premium bond’s price will fall towards its face value even if interest rates do not changes. 2. If a bond is selling at a discount, its price muse rise, reaching the par value by the maturity date.
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The Effect of interest rate on Price Movements Basic Valuation Equation: Price of the Bond (V). Equals to the present value of all promised cash flows from the bond (R),
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Unformatted text preview: when those cash flows are discounted to the present at bond’s yield to maturity (k). The Effect of interest rate on Price Movements The Bond Pricing Principles 1. Bond prices move inversely with interest rate. 2. The longer the maturity of a bond, the more sensitive is its price to a change in interest rate , holding other factors constant. 3. The price sensitivity of bonds increases with maturity, but at a decreasing rate. 4. The lower the coupon rate on a bond, the more sensitive is its price to a change in interest rate,holding other factors constant. 5. For a given bond, the capital gain caused by a yield decrease exceeds the capital loss caused by a yield increase of the same magnitude....
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