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 Inverse Relationship b/w Interest Rates & Bond Prices

  • Longer maturity bonds. Higher interest rate risk (all else same).
     
  • Smaller coupon bonds. Higher interest rate risk (all else same).
     
  • If market interest rates are high, price volatility will be lower than if market interest rates are low.
     
  • If call/put option is embedded, then interest rate risk will be lower.

 

 Floating Rate Securities have very low level of price volatility
 
  • If coupon rate > required market yield 
    bond price > par value: premium bond

     
  • If coupon rate < required market yield
    bond price < par value: discount bond

     
  • If coupon rate = required market yield
    bond price = par value: par bond

 





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