Outline of Session Outline of Session 4

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Bond Price Relationship to YTM When the coupon rate = the market interest rate (YTM), a bond will sell at par. When the coupon rate > the YTM, a bond will sell at a premium. When the coupon rate < the YTM, a bond will sell at a discount. But why? Last Updated: June 11, 2009 © 2009 Charn Soranakom, Ph.D. Session 4 | Slide 8 of 19
Interest Rate Risk (or Price Risk) Interest Rate Risk sometimes is called “Price Risk”. Investment in bonds (even in a risk−free bond like a government bond) can be risky due to fluctuation in the market interest rates. As you can see, when the market interest rate goes up, bond price declines, and vice versa, resulting in a gain or loss. Notes: Bond price does not decline in linear fashion. The longer the maturity of a bond, the greater the price risk, other things being equal. Why? The lower the coupon rate of a bond, the greater the price risk, other things being equal. Why? Last Updated: June 11, 2009 © 2009 Charn Soranakom, Ph.D. Session 4 | Slide 9 of 19
Page 1 and 2: Outline of Session 4 Three Basic Va
Page 3 and 4: Bonds Bonds are one type of fixed i
Page 5 and 6: Calculation of Bond Price Example:
Page 7: These curves are convex. Last Updat
Page 11 and 12: Stocks and the Stock Market Stocks
Page 13 and 14: P P 0 1 = = Div 1 ( 1 + r ) ( 1 + r
Page 15 and 16: Where Does g Come From? Year 1 2 3
Page 17 and 18: Preferred stock is classified as e
Page 19: In−class Exercises Let’s do som

Outline of Session Outline of Session 4

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