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5. Bond Prices - Fundamental Fixed-income Security...

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Fundamental Fixed-income Security Valuation (“Bond Pricing”) Rules 1. Bond prices move inversely to changes in interest rates. 2. A bond’s price is more sensitive to interest rates as the maturity of the bond is longer. That is, for a given change in interest rates, a bond with longer maturity is more price sensitive than a bond with a shorter maturity. That is, for a given change in market interest rates, a bond with longer maturity has greater interest rate risk. The compensation that investors require for this particular risk is generally referred to as the “maturity risk premium” or the "liquidity premium". 3. Price sensitivity increases as the coupon rate decreases. That is, a bond with a lower coupon rate is more price sensitive than a bond with a higher coupon rate. That is, a bond with a lower coupon rate has greater interest rate risk. 4. For a given change in interest rates (yield), a bond’s price sensitivity is greater when the bond’s yield is lower.
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