RATES, BOND PRICES, AND THE TERM STRUCTURE

There is a very close connection between bond prices and interest rates. We will focus on interest rate calculated from prices of traded US government securities

and show how the interest rate on a particularly simple type of security can be derived solely from it price. We focus on yields derived solely from it price. We focus on yields derived from US government securities because these assets are backed by the full faith and credit of the government and, therefore, have virtually no default risk.

The US government issues securities of many different maturities: the maturity is the length of time until the final payment on the security is made by the issuer. Treasury bonds are fixed coupon security with initial maturities of more than 10 years. Treasurers note are fixed coupon securities with initial maturities of the year or less.

If we know a bonds current price and payments that the bondholder will receive over the course of the bond’s life. We can calculated the implied interest rate on the bond. This interest rate called yield-to-maturity, equates the current price of the bond to the present valve of the bond’s payment stream. The relationship between the maturity of bonds and the interest rate implied by bond prices is called the term structure of interest rates. A plot of the relationship between interest rates on short-term. Bonds are lower than interest rates on long-term. Bonds as shown for the third quarter 1989. The shape of the typical yield curve shows that interest rates often vary with maturity. We might also suspect that the volatility of interest rates varies with maturity. But before we turn to how volatility is measured and how volatility is related to maturity. It’s clarify the relationship between interest rates and the price of particularly simple type of bond. Interest rates and bond prices. Interest rates on certain types of bonds can be derived

solely from the bonds price and maturity. Let’s look at a particular type of bond called a discount, or zero. Coupon bond. A discount bond sells at a discount from its face valve and makes no interest payments over its life time. When the bond matures, the bondholder received the bond’s face valve. For example, a one- year treasury bill with a face valve of $10,000 is a discount bond that promises to pay the holder &10,000 in one year’s time. Such a bond may sell for a current price of $9434, in which case the implied interest rate on the bond is 6 percent ($10,000-$9434) $9434 = 06) clearly, as the current price of the bond changes, the implied interest rate will change. For example suppose the current price of the bond falls to $9009. The implied interest rate on the bond is 11 percent C$i0,0000-9009) 1 $9009=.....................Request for the Full Material Now, Call Or text 07034538881 or Email us @ obejieric@gmail.com

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