Ch_06_Fixed_Inc_Inv

Ch_06_Fixed_Inc_Inv - Pricing Fixed-Income Securities 11...

Info iconThis preview shows pages 1–18. Sign up to view the full content.

View Full Document Right Arrow Icon
Pricing Fixed-Income Securities 11
Background image of page 1

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

View Full DocumentRight Arrow Icon
The Relationship Between Interest n Bond Prices n A bond’s price is the present value of the future coupon payments (CPN) plus the present value of the face (par) value (FV) 22 n n i FV CPN i CPN i CPN i CPN ) 1 ( ... ) 1 ( ) 1 ( ) 1 ( Price 3 3 2 2 1 1 + + + + + + + + + = n n t t t i) ( FV i) ( CPN + + + = = 1 1 Price 1
Background image of page 2
The Relationship Between Interest n Bond Prices and Interest Rates are Inversely Related n Consider a bond which pays semi- annual interest payments of $375 with a maturity of 3 years n If the market rate of interest is 7.50%, the price of the bond is: 33 000 , 10 $ ) 0375 . 1 ( 000 , 10 ) 0375 . 1 ( 375 Price 6 6 1 = + = = t t
Background image of page 3

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

View Full DocumentRight Arrow Icon
The Relationship Between n Bond Prices and Interest Rates are Inversely Related n Financial Calculator Solution 44 N I/YR PV PMT FV 6 ? 350 10,000 7.5 Gold P/YR 2
Background image of page 4
The Relationship Between Interest n Bond Prices and Interest Rates are Inversely Related n If the market rates of interest increases to 10%, the price of the bond falls to: 55 54 . 365 , 9 $ ) 05 . 1 ( 000 , 10 ) 05 . 1 ( 375 Price 6 6 1 = + = = t t
Background image of page 5

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

View Full DocumentRight Arrow Icon
The Relationship Between n Bond Prices and Interest Rates are Inversely Related n Financial Calculator Solution 66 N I/YR PV PMT FV 6 -9,365.54 375 10,000 10 Gold P/YR 2
Background image of page 6
The Relationship Between Interest n Bond Prices and Interest Rates are Inversely Related n If the market rates of interest decreases to 5%, the price of the bond rises to: 77 52 . 688 , 10 $ ) 025 . 1 ( 000 , 10 ) 025 . 1 ( 375 Price 6 6 1 = + = = t t
Background image of page 7

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

View Full DocumentRight Arrow Icon
The Relationship Between n Bond Prices and Interest Rates are Inversely Related n Financial Calculator Solution 88 N I/YR PV PMT FV 6 -10,688.52 375 10,000 5 Gold P/YR 2
Background image of page 8
The Relationship Between n Bond Prices and Interest Rates are Inversely Related n Par Bond n Yield to maturity = coupon rate n Discount Bond n Yield to maturity > coupon rate n Premium Bond n Yield to maturity < coupon rate 99
Background image of page 9

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

View Full DocumentRight Arrow Icon
The Relationship Between 1010
Background image of page 10
The Relationship Between n Bond Prices Change Asymmetrically to Rising and Falling Rates n For a given absolute change in interest rates, the percentage increase in an option-free bond’s price will exceed the percentage decrease 1111
Background image of page 11

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

View Full DocumentRight Arrow Icon
1212
Background image of page 12
The Relationship Between n Maturity Influences Bond Price Sensitivity n For bonds that pay the same coupon rate, long-term bonds change proportionally more in price than do short-term bonds for a given rate change 1313
Background image of page 13

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

View Full DocumentRight Arrow Icon
1414
Background image of page 14
The Relationship Between n The Size of the Coupon Influences Bond Price Sensitivity n For bonds that have the same maturity, long-term bonds will change proportionally more in price than short- term bonds for a given change in the rate change 1515
Background image of page 15

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

View Full DocumentRight Arrow Icon
1616
Background image of page 16
n Duration as an Elasticity Measure n Maturity simply identifies how much
Background image of page 17

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

View Full DocumentRight Arrow Icon
Image of page 18
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/07/2011 for the course FIN 653 taught by Professor Cobus during the Spring '08 term at S.F. State.

Page1 / 51

Ch_06_Fixed_Inc_Inv - Pricing Fixed-Income Securities 11...

This preview shows document pages 1 - 18. Sign up to view the full document.

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