Some Rules for Bond Pricing 041210

Some Rules for Bond Pricing 041210 - maturity. Some Rules...

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Some Rules for Bond Pricing. 1.) Bond Prices and yields are inversely related. 2.) An increase in a bond’s yield to maturity results in a smaller price change than a decrease in yield of equal magnitude. 3.) Prices of long-term bonds tend to be more sensitive to interest rate changes than prices of short-term bonds. 4.) The sensitivity of bond prices to changes in yield increases at a decreasing rate as maturity increases. (Interest rate risk is less than proportional to maturity.) 5.) Interest rate risk is inversely related to the bond’s coupon rate. Prices of high coupon bonds are less sensitive to interest rate changes than prices of low coupon bonds. 6.) The sensitivity of a bond’s price to a change in yield to maturity is inversely related to the yield to maturity at which the bond is currently selling. That is, a bond with a high yield to maturity is less sensitive to a change in yield to maturity than a bond with a low yield to
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Unformatted text preview: maturity. Some Rules for Bond Duration. 1.) The duration of a zero-coupon bond is equal to its time to maturity. 2.) Holding the time to maturity and yield to maturity constant, a bonds duration and interest rate sensitivity are higher when the coupon is lower. (This result is similar to #5 above.) 3.) Holding the coupon constant, duration and interest rate sensitivity generally increase with the time to maturity. Duration always increases for bonds selling at par or at a premium. (This result is similar to #3 above.) 4.) Holding other factors constant, duration and interest rate sensitivity of a coupon bond are higher when the bonds yield to maturity is lower. (This result is similar to #6 above.) (Duration Rule #4 does not apply to zero-coupon bonds because the duration of a zero-coupon bond is always the term to maturity, regardless of the yield to maturity.) 5.) The duration of a level perpetuity equals (1+i) / i....
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This document was uploaded on 11/02/2011 for the course INVESTMENT 390 at Rutgers.

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