Fixed Income Class Notes Chapter 1 – 10/20/11 Time value of Money – today’s dollar worth more than one in the future due to inflation. Rarely, deflation may cause the opposite. e.g. Great Depression In a perfect world, only time value of money would impact bond price today. Closest example is sovereign debt of the strongest economies (USA, Germany). Meaning Treasury bonds are priced based on inflation (default-free ). Troubled national economies like Greece priced at inflation plus a factor indicating risk of default. New Greek debt is expensive for them to raise. Inclusion of Greece, Portugal in the Euro zone has caused political & economic stress within the stronger Euro partners (Germany, France), and concerns among investors in Greek debt including, Asians, USA and others. US sovereign debt (Treasuries) can be sold in coupon or zero coupon forms. Coupons pay accrued interest at half year intervals, zeros pay interest at maturity of the bond, along with return or rollover of the principal.
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