Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
Typically in a bond, we find an inverse relation between the price and the required yield. We know that the price of the bond is the present value of cash flows. If the required yield increases, the present value of the cash flow declines and hence the bond value also declines. Let us compute the relationship between the price and the required yield for a bond with a coupon rate of 10% with par value of Rs.100 maturing after 10 years for different required yields as per the table given below:
Table 1: Price-Yield Relationship
Yield (in %)
Price in Rs.
4
148.70
6
129.40
8
113.40
10
100.05
12
88.70
14
79.16
16
71.53
18
64.04
Figure 1: Price/Yield Relationship for an Option Free Bond
If we plot a graph the price-yield relationship, we get a convex curve as seen above in the graph. This convexity has important implications with investment characteristics of a bond. Whenever yields in the market change, the bond prices also change to compensate the yield expectations of the investor. For example, if the coupon rate of a bond is 11% and the present market coupon rate for similar bonds is 12%, then the bond value gets depleted as it yields only 11% as against the current market yield of 12%. Conversely, if the current market yield is 9.5%, then the bond gets traded at premium as the bond under reference gives an yield of 11% as against the current yield of 9.5%. When the bond is sold below par value, then it is said to be sold at a discount. When the bond is sold above par value, it is said to be traded at a 'premium'. It can be summed up as follows:
Coupon rate = Required yield then price = Par value
Coupon rate < Required yield then price < Par (discount)
Coupon rate > Required yield then price > Par (premium).
Changes in the bond value is inversely related to the change in the interest rates. If an investor holds a long bond position, he would incur loss if the in
Eurobond A corporate bond denominated in U.S. dollars or other hard currencies and sold to investors outside the country whose currency is used. Eurobonds have become an impor
LIMITATIONS OF BUDGETARY CONTROL 1. It involves predicting the future which is not certain. 2. Market is continuously and dynamically evolving. Hence budgets based on past
This assignment is an analysis of a U.S. publicly-traded company; its common stock could be a prospective investment. The report is due in Week 10, in needs to be at least 5 pages
Securitization -Source of financing whereby an entity's ASSETS (characteristically mortgage loans, lease obligations or other kinds of RECEIVABLES) are placed in a special purpose
Foreign Exchange Market Equilibrium: We say that the foreign exchange market is in equilibrium when deposits of all currencies oer the same expected rate of return (when retu
'Foreign Exchange Market': Definition of 'Foreign Exchange Market' The markets, in which participants are able to sell, buy exchange and speculate on currencies. Foreign e
How do mergers affect consumers? A: The impacts mergers have on consumers vary widely. There may be a few inconvenience and anxiety when a customer's bank or branch is obtained
State the term nature of financial instruments. Nature of financial instruments (securities): Financial instruments (termed as securities) can be classifies in two broad
how can an operating cycle be applied to a poultry business
Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!
whatsapp: +91-977-207-8620
Phone: +91-977-207-8620
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd