5 Bond Prices - Fundamental Fixed-income Security Valuation(Bond Pricing Rules 1 2 Bond prices move inversely to changes in interest rates A bonds

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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. That is, for a given change in yield, a bond with a lower
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/27/2009 for the course UGBA 133 taught by Professor Distad during the Summer '08 term at University of California, Berkeley.

Page1 / 2

5 Bond Prices - Fundamental Fixed-income Security Valuation(Bond Pricing Rules 1 2 Bond prices move inversely to changes in interest rates A bonds

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online