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lec03_02

lec03_02 - ECON 4721H Money and Banking Lecture 03_02...

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Unformatted text preview: ECON 4721H Money and Banking Lecture 03_02 Satoshi Tanaka University of Minnesota October 3, 2010 Satoshi Tanaka ECON 4721H Money and Banking Lecture 03_02 Bond Market II Hedging Interest Rate Risks Satoshi Tanaka ECON 4721H Money and Banking Lecture 03_02 What Is Yield? Consider a bond from period t to period t + N . De nition (Yield) For each bond, given a price, p t , a face value, B N , and a coupon, C N , a yield, r t , N , is the value which satis es the following equation, p t = B N ( 1 + r t , N ) N + N ∑ τ = 1 C N ( 1 + r t , N ) τ You can say a yield is a constant discount rate, which is de ned for each bond. Satoshi Tanaka ECON 4721H Money and Banking Lecture 03_02 Bond's Price and Yield Note: Bond's price, p t , and yield, r t , N , have a negative relationship. Yield r t,N Bond’s Price p t Figure: The Relation between Bond Price and Yield Satoshi Tanaka ECON 4721H Money and Banking Lecture 03_02 Duration De nition (Duration) Duration of a bond with price, p t , and yield, r...
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lec03_02 - ECON 4721H Money and Banking Lecture 03_02...

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