Chapter 6 - supply curve to the right • Changes in...

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Chapter 6 Bonds, Bond Prices, and the Determination of Interest Rates I. Bond prices a. Zero-coupon bonds- price is the present value of that payment b. Fixed-payment loans c. Coupon bonds d. Consols- perpetuities II. Bond yields a. Yield to maturity Price ; Rates b. Current yield measure of the proceeds the bond-holder receives for making a loan = yearly coupon payment/price paid c. Holding period return = current yield + capital gain III. The bond market and the determination of interest rates a. Bond supply, bond demand, and equilibrium in the bond market Higher the price of a bond, the larger the quantity supplied Price falls, demand rises Higher the demand, higher the yield Excess demand puts upward pressure on the price b. Factors that shift bond supply Changes in government borrowing-increase in quantity shifts the
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Unformatted text preview: supply curve to the right • Changes in general business conditions • Changes in expected inflation-increase in expected inflation shifts supply curve to the right c. Factors that shift bond demand • Wealth-shifts demand to the right • Expected inflation-decline in expected inflation shifts demand curve to the right • Expected returns and expected interest rates • Risk relative to alternatives-less risky, increase demand • Liquidity relative to alternatives-more liquid, increase demand d. Understanding changes in equilibrium bond prices and interest rates • When both curves shift in the same direction, the price can rise or fall IV.Why bonds are risky a. Default risk b. Inflation risk c. Interest-rate risk...
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This note was uploaded on 05/10/2010 for the course ECO 3223 taught by Professor Staff during the Spring '08 term at University of Central Florida.

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