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Ch_06_Fixed_Inc_Inv

# Ch_06_Fixed_Inc_Inv - Pricing Fixed-Income Securities 11...

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Pricing Fixed-Income Securities 11

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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
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

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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
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

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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
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

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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
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

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The Relationship Between 1010
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

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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

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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

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n Duration as an Elasticity Measure n Maturity simply identifies how much

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Ch_06_Fixed_Inc_Inv - Pricing Fixed-Income Securities 11...

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