Portfolio Allocation

Portfolio Allocation - Portfolio Allocation From Last Time...

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Portfolio Allocation From Last Time Why would anyone pay more for a bond than its face value? Well, suppose you have a bond that has a face value of $1000 and pays $80 a year interest. The interest rate on your bond is 8%. Suppose a new bond is issued for $1000 that pays just $50 a year interest. What happens to the value of your bond? People will be willing to pay more than $1000 for your bond because it pays higher interest than newly issued bonds with the same face value. Your bond rises in value to $1600. The person who buys your bond for $1600 receives $80 a year in interest plus $1000 when the bond matures. Their yield to maturity is less than the 8% coupon rate of the bond because of the capital loss they will suffer. The yield to maturity depends on both the bond's coupon rate and any capital gain/loss the holder receives. The inflation rate will be negative when the average price level falls. An inflation rate of -7% means that prices have fallen 7% on average. If you plan to hold a bond to maturity, changes in interest rates will have no effect on
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Portfolio Allocation - Portfolio Allocation From Last Time...

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