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Measuring the Sensitivity of a Bond's Price to Changes in the Market Interest Rates
Finance & Accounting
Pages 6 (1506 words)
MEASURING THE SENSITIVITY OF A BOND’S PRICE TO CHANGES IN THE MARKET INTEREST RATES Name: ------------ Professor: ------------ Institution: ------------ Course: ------------ Date: ------------ A bond is a long term debt issued by government or firms to individuals that yields returns known as coupons on the principal value.
On the other hand, bonds issued by companies are used for long term financing of the firm since they mature after a long period of time, usually more than ten years. Coupons are mostly paid out twice in a year but some could be payable once in a year. On maturity of a given bond, the bondholders are entitled to the principal amount initially invested at the present value at maturity. A bond may be issued at a discount or at a premium. If it is issued at a discount, the amount realized from such an issue is less than the face value of the bond. This occurs mostly when the interest rates of the bonds are low; therefore the government or the firms have to induce investors to invest in such a bond by lowering the prices of the bonds. On the other hand, if the amounts of funds realized from a bond issue are more than the face value of the bond, the bond is said to have been issued at a premium. This mostly occurs when the rates of return of the bond in question are relatively high and the bond is expected to yield some high returns in terms of the coupons. Investors will take into account the high amount of returns expected in the future and many will be interested in buying the bonds. These investors will be willing to pay a higher price for the bond, higher than the bonds face value. ...
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