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    Chapter 17: Bonds: Bond Price Movement

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    saanmit
    Bonds are debt instruments where an investor loans money to a borrower (bond issuer) in exchange for regular interest payments and repayment of the principal when the bond matures. There are two main types of bonds: risk-free bonds issued by governments and riskier corporate bonds. Bond prices fluctuate inversely with bond yields - as prices go up, yields go down and vice versa. Investors consider factors like time to maturity, credit quality, and expected changes in interest rates when choosing between different bonds to maximize returns while balancing risk.

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    Chapter 17: Bonds: Bond Price Movement

    Uploaded by

    saanmit
    49 views2 pages
    Bonds are debt instruments where an investor loans money to a borrower (bond issuer) in exchange for regular interest payments and repayment of the principal when the bond matures. There are two main types of bonds: risk-free bonds issued by governments and riskier corporate bonds. Bond prices fluctuate inversely with bond yields - as prices go up, yields go down and vice versa. Investors consider factors like time to maturity, credit quality, and expected changes in interest rates when choosing between different bonds to maximize returns while balancing risk.

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    Chapter Outline

    Original Title

    Chapter 17

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    Bonds are debt instruments where an investor loans money to a borrower (bond issuer) in exchange for regular interest payments and repayment of the principal when the bond matures. There are two main types of bonds: risk-free bonds issued by governments and riskier corporate bonds. Bond prices fluctuate inversely with bond yields - as prices go up, yields go down and vice versa. Investors consider factors like time to maturity, credit quality, and expected changes in interest rates when choosing between different bonds to maximize returns while balancing risk.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    49 views2 pages

    Chapter 17: Bonds: Bond Price Movement

    Uploaded by

    saanmit
    Bonds are debt instruments where an investor loans money to a borrower (bond issuer) in exchange for regular interest payments and repayment of the principal when the bond matures. There are two main types of bonds: risk-free bonds issued by governments and riskier corporate bonds. Bond prices fluctuate inversely with bond yields - as prices go up, yields go down and vice versa. Investors consider factors like time to maturity, credit quality, and expected changes in interest rates when choosing between different bonds to maximize returns while balancing risk.

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    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
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    of 2

    Chapter 17: Bonds

    Equity = Ownership, Stocks


    Debt = Borrower/ender, bonds
    o Corner stone: 1! year "#S# $reasury, and $%Bi&&
    're risk (ree rates and used as C')*
    Bond Price Movement
    o Discounted cash +ows o( in+ows
    Coupon/,nterest
    o 's prices -oes up, the yie&d -oes down and .ice .ersa#
    o /hy does it ha.e a price 0o.e0ent1
    Because i( so0eone buys a bond at a discount, the
    .a&ue o( the bond wi&& decrease#
    'nd the yie&ds wi&& -o up
    o *onday:
    2ohn buys a 1! year "S $reasury at a yie&d o( 34# ,t
    pays 51!! at par .a&ue#
    o $uesday:
    6ie&d -oes up to 74# 2ohn -ets upset#
    8ow do you bui&d yie&ds1
    o 9isk :ree Bonds:
    ;o0ina& 9ate= 9ea& ,nterest < ,n+ation
    9ea& interest is the nu0ber you=d -o (ro0
    consu0in- .s# spendin-#
    8i-her interest rate: sa.e
    o 9isky Bonds:
    ;o0ina& 9ate = 9ea& ,nterest < ,n+ation < 9isk
    pre0iu0
    6ou take 0ore risk when in.estin- in co0panies
    .s# the -o.ern0ent
    /hat kind o( risk pre0iu0s do we ha.e1
    $i0e
    >ua&ity/Credit/De(au&t risk
    6ie&d Spread
    o *easure o( return between co0panies or -o.ern0ent#
    6ie&d Cur.e
    o ;or0a&
    o :&at
    o ,n.erted
    ?arious 6ie&d *easures
    o 6ie&d to *aturity @6$*A: $he discount rate that equates the
    cash +ows and the current price o( the bond#
    o 6$* has two assu0ptions that are questionab&e:
    'ssu0es that you are -oin- to ho&d the security ti&& it
    0atures#
    'ssu0es that current interest rates ne.er chan-es
    $his is ca&&ed rein.est0ent risk
    Diference between stocks and bonds:
    Stocks:
    o :or -rowth dri.ers
    o e.era-e B:1
    Buy B stocks, on&y spend 51
    Bonds:
    o Steady inco0e (or conser.ati.e
    o $o reduce the risk
    o )rice appreciation (or short%ter0 specu&ators
    o e.era-e @1!:1A
    Buy 1! bonds, on&y spend 51
    Bond Yields
    6ie&d to *aturity
    o Ca&cu&ated before you purchase the bond
    o *ost do0inant yie&d
    Current yie&d: current coupon you recei.e/current price o( the bond
    o Error: Doesn=t inc&ude price appreciation
    9ea&iCed co0pound yie&d
    o Ca&cu&ated yie&d after the bond 0atures
    8oriCon yie&d
    o *ake assu0ptions &ike: chan-in- interest rates
    Types of Bonds
    'cti.e:
    o EDpensi.e eDpense ratio
    o 8a.e to &ook (or where the interest rates are -oin-
    )assi.e
    o Cheaper eDpense ratio
    o ,ndeD
    o E$:
    Bond buyers:
    8ate in+ation
    o.e econo0ic weakness
    o.e Enancia& crises
    o $he +i-ht to sa(ety: peop&e rush to the sa(ety o( the
    -o.ern0ent when there are Enancia& crises in the 0arket
    Bond Path:
    )u&&ed to par: $he prices near the end are pu&&ed to the par .a&ue
    Cash +ows:
    o Coupon
    o )rincipa&
    o ,nterest on interest
    /e -et 0ost o( our 0oney (ro0 the co0poundin-
    Duration: a bond=s price sensiti.ity to chan-es in interest rates

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