26. <br />What causes the inverse relationship between interest rates and bond prices?<br />
Imagine:<br />Interest rates in the market are sitting at 5%. You decide it’s time to buy a bond!<br />Here are the vitals...
Raise your Hand
Responsibilities</li></li></ul><li>Imagine:<br />Interest rates in the market are sitting at 5%. You decide it’s time to b...
Raise your Hand
Responsibilities</li></li></ul><li>Imagine:<br />Interest rates in the market are sitting at 5%. You decide it’s time to b...
Raise your Hand
Responsibilities</li></li></ul><li>Imagine:<br />Interest rates in the market are sitting at 5%. You decide it’s time to b...
Raise your Hand
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Inverse

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Inverse relationship between bond price and interest rates.

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Inverse

  1. 1. 26. <br />What causes the inverse relationship between interest rates and bond prices?<br />
  2. 2. Imagine:<br />Interest rates in the market are sitting at 5%. You decide it’s time to buy a bond!<br />Here are the vitals for MyFirstBond Corp’s new issue:<br />Matures in 4 years<br />Costs $100<br />Pays interest of 5% per year<br /><ul><li>Assessment Strategies
  3. 3. Raise your Hand
  4. 4. Responsibilities</li></li></ul><li>Imagine:<br />Interest rates in the market are sitting at 5%. You decide it’s time to buy a bond.<br />Here are the vitals for MyFirstBond Corp’s new issue:<br />Matures in 4 years<br />Costs $100<br />Pays interest of 5% per year<br /><ul><li>Assessment Strategies
  5. 5. Raise your Hand
  6. 6. Responsibilities</li></li></ul><li>Imagine:<br />Interest rates in the market are sitting at 5%. You decide it’s time to buy a bond.<br />Here are the vitals for MyFirstBond Corp’s new issue:<br />Matures in 4 years<br />Costs $100<br />Pays interest of 5% per year<br /><ul><li>Assessment Strategies
  7. 7. Raise your Hand
  8. 8. Responsibilities</li></li></ul><li>Imagine:<br />Interest rates in the market are sitting at 5%. You decide it’s time to buy a bond.<br />Here are the vitals for MyFirstBond Corp’s new issue:<br />Matures in 4 years<br />Costs $100<br />Pays interest of 5% per year<br /><ul><li>Assessment Strategies
  9. 9. Raise your Hand
  10. 10. Responsibilities</li></li></ul><li>Imagine:<br />Interest rates in the market are sitting at 5%. You decide it’s time to buy a bond.<br />Here are the vitals for MyFirstBond Corp’s new issue:<br />Matures in 4 years<br />Costs $100<br />Pays interest of 5% per year<br /><ul><li>Assessment Strategies
  11. 11. Raise your Hand
  12. 12. Responsibilities</li></li></ul><li>Matures in 4 years<br />Costs $100<br />Pays interest of 5% per year<br /> <br /> According to the approximate yield to maturity formula, theyield of this bond would be:<br /> <br />= (Interest Income + annual price change)/ [(100 + bond price)/2]<br /> <br />= ($5 + $0) / [(100 + 100)/2] = 5%<br /><ul><li>Assessment Strategies
  13. 13. Raise your Hand
  14. 14. Responsibilities</li></li></ul><li>Matures in 4 years<br />Costs $100<br />Pays interest of 5% per year<br /> <br /> According to the approximate yield to maturity formula, theyield of this bond would be:<br /> <br />= (Interest Income + annual price change)/ [(100 + bond price)/2]<br /> <br />=($5 + $0) / [(100 + 100)/2] = 5%<br /><ul><li>Assessment Strategies
  15. 15. Raise your Hand
  16. 16. Responsibilities</li></li></ul><li>Matures in 4 years<br />Costs $100<br />Pays interest of 5% per year<br />Before moving on, note the following:<br />When interest rates are the same as the coupon rate, the price of the bond is <br />A-L-W-A-Y-S 100 (also known as Par).<br /><ul><li>Assessment Strategies
  17. 17. Raise your Hand
  18. 18. Responsibilities</li>

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