FIN 300 Exam 2 Study Guide

FIN 300 Exam 2 Study Guide - FIN 300 Exam 2 Study Guide...

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FIN 300 Exam 2 Study Guide: Bonds o Realized Yield The return earned on a bond given the cash flows actually received by investor The interest rate at which the present value of actual cash flows generated by the investment equals bond’s price The realized yield is important because it allows investors to see what they actually earned on their investments. o Bond Theorems Bond theorems are statements about the math used in bond pricing. Bond prices are inversely related to interest rate movements. As interest rates decline, prices of bonds rise; as interest rates rise, prices of bonds decline. For a given change in interest rates, prices of longer-term bonds change more than prices of shorter-term bonds. Interest rate risk increases as maturity increases, but at a decreasing rate. o Bond Theorems For a given change in interest rates, prices of lower-coupon bonds change more than prices of higher-coupon bonds. o Bond Theorem Applications If interest rates are expected to increase, avoid long-term bonds – they will experience the largest price declines.
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