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Class 6

# Class 6 - Warren Buffett • “If yield declines the price...

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Ch. 9: Bonds 6. o A. Every year receive (\$1000 x 5%) plus \$1000 at end of year 30 What should price of bond be? 50/ (1+.08)^1 + 50/ (1+.08)^2 + … Sum up cash flows to get price At a yield of 8% the price of a bond is… o B. Every year receive (\$1000 x 10%) When you buy a bond you are paying the price, not the face value o C. For 5 years receive (\$1000 x 10%) 2 ways of listing price of a bond: Yield Price Both are inversely related

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Unformatted text preview: Warren Buffett: • “If yield declines, the price of my investment increases” • “Which of these bonds gives me the highest % increase in price?” A decrease in yield has greatest impact on long-maturity bonds • 5. o i. Annual return: • 7% x \$100 = \$7 and \$100 in year 5 • GoalSeek in “what if? Analysis” under Data tab in Excel • “Annualized YTM” = semi-annual yield x 2...
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Class 6 - Warren Buffett • “If yield declines the price...

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