FIN 3310 Lecture Notes - Lecture 5: Callable Bond, Debenture, Accrued Interest
Document Summary
Bond prices: relationship between coupon and yield. If ytm = coupon rate, then par value = bond price. If ytm > coupon rate, then par value > bond price. Price below par value, called a discount bond. If ytm < coupon rate, then par value < bond price. Higher coupon rate causes value above par. Price above par vale, called a premium bond. Change in price due to changes in interest rates. Long-term bods have more price risk than short-term bond. Low coupon rate bonds have more price risk than high coupon rate bonds: reinvestment risk. Uncertainty concerning rates at which cash flows can be reinvested. High coupon rate bonds have more reinvestment rate risk than low coupon rate. Short-term bonds have more reinvestment rate risk than long term bonds bonds. Bond pricing theorems: bonds of similar risk (and maturity) will be priced to yield about the same return, regardless of the coupon rate.
