ACTSC371 Chapter Notes - Chapter 14: Spot Contract, Inflation-Indexed Bond, Yield Curve
5 Oct 2018
School
Department
Course
Professor
Document Summary
Interest rates change constantly for a variety of reasons (supply, demand, foreign exchange, central bank actions, etc. ). Bond prices move inversely with changes in interest rates. Example: consider four ,000 bonds: a 10% coupon bond with 5 years to maturity and priced to yield 10%, a. The first three are obviously priced at par - ,000 but the last bond is trading at . 77. Observe what happens when we change the yield to maturity to either 9% or 11% (1% up or down). In fact, we can draw the following conclusions (the first 5 are known as burton malkiel"s bond-pricing relationships): Clearly, maturity is a major determinant of interest rate risk. Now compare the price changes to a zero coupon bond consider a 5 year ,000 zero priced to yield 10% s. a. and a 30 year ,000 zero priced to yield 10% s. a. Clearly the gain/loss on the zero is ___________________ than the gain/loss on the comparable coupon bond.
