Interest rate risk-types_of_bonds

IMPACT ON FIXED INCOME SECURITIES INTEREST RATE RISK

Bonds, bond prices and interest rates ,[object Object],[object Object],[object Object]

Bonds: 3 types ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Zero coupon bonds ,[object Object],[object Object],[object Object],[object Object],[object Object]

Example ,[object Object],[object Object],[object Object]

yield on a discount basis (127) ,[object Object],[object Object],i db = F - P F x 360 d

example ,[object Object],[object Object],[object Object]

[object Object],[object Object],[object Object],[object Object]

[object Object],[object Object],[object Object]

example 2: fixed pmt. loan ,[object Object],[object Object],[object Object],[object Object],[object Object]

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

i m =1.44% i=(1+. 0144) 12 – 1 =18.71%

[object Object],[object Object],[object Object],[object Object],[object Object]

Bond Yields ,[object Object],[object Object],[object Object],[object Object]

Yield to Maturity (YTM) ,[object Object],[object Object],P = PV of cash flows

Current yield ,[object Object],i c = annual coupon payment bond price

example ,[object Object],[object Object],[object Object],i c = 600 9750 = 6.15%

Holding period return ,[object Object],[object Object],[object Object],[object Object],[object Object]

example ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

[object Object],[object Object]

The Bond Market ,[object Object],[object Object],[object Object]

Bond supply ,[object Object],[object Object]

Shifts in bond supply ,[object Object],[object Object],[object Object],[object Object]

[object Object],[object Object],exp. profits supply of bonds (shift rt.) ,[object Object]

[object Object],[object Object],exp. inflation supply of bonds (shift rt.)

Bond Demand ,[object Object],[object Object]

[object Object],Bond yield Qd of bonds price of bond Qd of bonds

Bond price Quantity of bonds D

[object Object],[object Object],inflation expected to demand for bonds (shift left)

[object Object],[object Object],int. rates expected to demand for bonds (shift left)

[object Object],relative risk of bonds demand for bonds (shift left)

[object Object],relative liquidity of bonds demand for bonds (shift rt.)

Bond market equilibrium ,[object Object],[object Object],[object Object]

Example 1: the Fisher effect ,[object Object]

Fisher effect ,[object Object],[object Object]

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Why shift Bs > shift Bd? ,[object Object],[object Object],[object Object]

Why are bonds risky? ,[object Object],[object Object],[object Object],[object Object]

Default risk ,[object Object],[object Object],[object Object],[object Object]

Inflation risk ,[object Object],[object Object],[object Object],[object Object]

Interest rate risk ,[object Object],[object Object],[object Object]

Interest rate risk-types_of_bonds

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