Interest Rate Risk
As we saw in Chapter 1, interest rates go up and down over time, and an increase in interest rates leads to a decline in the value of outstanding bonds. This risk of a decline in bond values due to rising interest rates is called interest rate risk. To illustrate, suppose you bought [...]
Being addicted to alcohol and drugs is worst way of life. It may change your behaviors, ruin your future and destroy your family. Those things may happen because people with alcohol or drug addiction may do every possible thing to get their bad habit even crimes. You need to get out from that hell and [...]
Although some bonds pay interest annually, the vast majority actually pay interest semiannually. To evaluate semiannual payment bonds, we must modify the valuation model (Equation 4-1) as follows:
1. Divide the annual coupon interest payment by 2 to determine the dollars of interest paid each six months.
2. [...]
If you examine brokerage house reports on bonds, you will often see reference to a bond’s current yield. The current yield is the annual interest payment divided by the bond’s current price. For example, if MicroDrive’s bonds with a 10 percent coupon were currently selling at $985, the bond’s current yield would be 10.15 percent [...]
have the option of holding the bond until it matured. Therefore, the yield to maturity would not be earned. For example, if MicroDrive’s 10 percent coupon bonds were callable, and if interest rates fell from 10 percent to 5 percent, then the company could call in the 10 percent bonds, replace them with 5 percent [...]
Importance of Bond Ratings Bond ratings are important both to firms and to investors. First, because a bond’s rating is an indicator of its default risk, the rating has a direct, measurable influence on the bond’s interest rate and the firm’s cost of debt. Second, most bonds are purchased by institutional investors rather than individuals, [...]
Note that interest rate risk relates to the value of the bonds in a portfolio, while reinvestment rate risk relates to the income the portfolio produces. If you hold long-term bonds, you will face interest rate risk, that is, the value of your bonds will decline if interest rates rise, but you will not face [...]
Interest Rate Risk
As we saw in Chapter 1, interest rates go up and down over time, and an increase in interest rates leads to a decline in the value of outstanding bonds. This risk of a decline in bond values due to rising interest rates is called interest rate risk. To illustrate, suppose you bought [...]
To have a debt in your life must be something terrifying as it would definitely prevent you from getting the chances in enjoying the cheerful life, wouldn’t it? Well, if such mess happens on you, there is nothing to be afraid of anyway. Why? Well, just like other problems in this world, this thing also [...]
If you examine the bond market table of The Wall Street Journal or a price sheet put out by a bond dealer, you will typically see information regarding each bond’s maturity date, price, and coupon interest rate. You will also see the bond’s reported yield. Unlike the coupon interest rate, which is fixed, the bond’s [...]
