FINE 2000 Chapter Notes - Chapter 7: United States Treasury Security, Deflation, Fisher Hypothesis
1 Feb 2017
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Chapter 7 interest rates and bond valuation. 7. 1 bonds and bond valuation: government or corporation will issue bonds to the public when they are in need of money. Bond features and prices: borrower pays the interest for each period and repays the principal in the last period, coupon - the stated interest payment made on a bond. Bond value: = pv of coupons + pv of face payment, = pv of annuity + pv of lump sum. Interest rates increase --> pv decreases --> value of bond decreases. Interest rates decrease --> pv increases --> value of bonds increases. Note: the c value = face value * cr. If ytm = cr --> par value = bond price. If ytm > cr --> sold at a discount (par value > bond price) If ytm < cr --> sold at a premium (par value < bond price)
