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3. When the expected rate of inflation changes, the expectations for future interest rates also change. An increase in inflation will bring an increase in interest rates, all things being equal. In such a situation, bond prices will go down. If the expected rate of inflation drops, bond prices will increase in anticipation of a potential interest rate cut. The intensity of the price change will depend on the maturity of the bond. Part of the bond's price is determined by its time value, which is the risk of an adverse change in interest rates. Longer bonds have greater interest rate risk, therefore they are subject to more intense changes as a result of changes in the expected inflation rate.
One outcome of this is a change in the yield curve. If inflation is expected to drop, bond prices will increase. This will reduce the yields. Because the long end of the curve has sharper reactions to such changes, it could end up dropping below the front end. This is what is known as an inverted yield curve. It is a predictor of recession because...
Duration is the sensitivity of a bond to interest rate changes. In general, duration increases with time to maturity, but is always less than the remaining time to maturity of the bond. Duration is important for measuring the interest rate risk of the portfolio. Investors often have the choice between bonds of similar maturity, but those seeking to lower interest rate risk would choose the one with the lowest duration (Liu, 2006). The market value of the bond portfolio is influenced by the degree of interest rate risk, so this is often an important consideration for investors and investment advisers.
Works Cited:
No author. (2009). Current yield. Investopedia. Retrieved December 12, 2009 from http://www.investopedia.com/terms/c/currentyield.asp
Liu, D. (2006). Bond portfolio's duration and investment term structure management problem. Journal of Applied Mathematics and Stochastic Analysis. Vol. 2006,…
Works Cited:
No author. (2009). Current yield. Investopedia. Retrieved December 12, 2009 from http://www.investopedia.com/terms/c/currentyield.asp
Liu, D. (2006). Bond portfolio's duration and investment term structure management problem. Journal of Applied Mathematics and Stochastic Analysis. Vol. 2006, 1-19..
Bond Selection A "make-whole" call allows the issuer of a bond to pay off the bond early. The payment to the bondholder is based on the net present value of the future payments remaining on the bond (Investopedia, 2012). This provision does not necessarily make the investors whole. The investors receive the net present value of the future payments on the bond. For the investor, the discount rate used to calculate
03)^20]] 6. The formula for calculating the price of a zero coupon bond is P = M / (1 + I )^n In this case, the interest is priced to 9% and the term to 20 years. These figures are doubled, because the price of zero coupon bonds is based on semi-annual. Therefore, the price of this bond would be 1000 / (1 + .045) ^ 40 = 171.93. 7. We would use the
Retirement Options Almost one-third of American workers are failing to prepare themselves for a comfortable retirement, according to a new survey conducted by American Express. The national telephone survey of working adult men and women who had recently left or lost their jobs revealed that 30% did not invest for retirement in their company's 401(k) plan. The survey also revealed that 16% of these participants rolled their money into an IRA, and
Case Study Part I Suppose Jagdambay manufacturing sells a bond paying a coupon rate of 5% per year with par value (face value) of $200,000 when the market rate is only 4% per year. The bond has 5 years until maturity. What is the bond’s price today if market rate is 5%? Show your computations The issuance of bonds is done with a fixed par value and the dividends paid out to preferred stockholders
Treasury Securities and Business Risks What is meant by "risk-free?" Risks are unplanned occurrences that affect the normal occurrences within a business or any other project. A risk-free scenario is anything that occurs without the possible occurrences of risks. Therefore, in an economic undertaking, risks are occurrences that occur contrary to the planned business or economic programs (Garbade, 2012). Thus, a risk-free status refers to a business occurrence where the established safety
Iacobucci and Triantis clarify that any type of corporation with legal personhood qualifies to issue debt as long as it can own property, enter contracts and be sued. Corporates can be issued in bearer form, where the holder of the actual certificate is required to update information periodically with the trustee or issuer, or as "registry" bonds, with the owner named but which carry no material coupons. "Book entry" bonds reside