ACC 308 Lecture Notes - Lecture 8: Treasury Stock, Cash Flow, Covered Call
Document Summary
Inverse relationship between bond prices and interest rate (or yields) Long-term bonds are more price sensitive than short-term bonds. Sensitivity of bond prices to change in yields increases at a decreasing rate as maturity increases. A bond"s pri(cid:272)e sensitivity is inversely related to the (cid:271)ond"s coupon. Sensitivity of a (cid:271)ond"s pri(cid:272)e to a change in its yield is inversely related to the ytm at which the bond is currently selling. An in(cid:272)rease in a (cid:271)ond"s ytm results in a smaller price decline than the gain associated with a decrease in yield. Term for the effective maturity of a bond. A higher coupon results in a lower duration (varies inversely) Duration is shorter than maturity for all bonds except zero coupon (cid:271)onds (cid:894)it"s =(cid:895) Price change is proportional to duration and not to maturity: =capital surplus + par value + retained earnings -cost of treasury shares. *if the stock is correctly priced, required return should equal expected hpr.
