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Unformatted text preview: igher interest rate risk, since
long-term bond prices are more sensitive to changes to the interest rate.
The yield to maturity required by investors is determined by
1. Interest rate risk
2. Time to maturity
3. Default risk
The default risk (or credit risk) is the risk that the bond issuer may default on its obligations. The default
risk can be judged from credit ratings provided by special agencies such as Moody's and Standard and
Poor's. Bonds with high credit ratings, reflecting a strong ability to repay, are referred to as investment
grade, whereas bonds with a low credit rating are called speculative grade (or junk bonds).
In summary, there exist five important relationships related to a bond's value:
1. The value of a bond is reversely related to changes in the interest rate
2. Market value of a bond will be less than par value if investor’s required rate is above the coupon
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12