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1、Howdoesinterestrateaffectthepriceofbonds?Thereisarelationshipbetaturityofabondhasanimpactonitspricesensitivitytointerestrates.Thisarticleexaminestherelationship. Adollartodayisorethanadollarinthefuture,simplybecauseadol-lartodaycanbedepositedintoabankac-counttoearninterest.Ifone-y
2、earinterestratesare5%,the$1receivedtodayanddepositedintothebankaccounte. $1todayisalsoknoplediscountingformula:- PresentValue=sumoffuturecashflople,thepresentval-ueof$1:- =$1.05/(1+5%)=$1.00 Abondholderreceivesastreamofinterest,orcouponsforoaturityofthebond.Inordertoreceivetheses
3、treamsoffuturecashfloatu-rity,discountedattheappropriateinterestrate,aturity(YTM)ofthebond. TheYTMisthecurrentmarketinterestrates,thefixedinterestorcouponratepaidbyeachbond.TheYTMisdeterminedby(amongotherfactors)inflation,demandandsupplyoffundsandCentralBankpolicy.Ontheotherhand,t
4、hebondscouponorfixedin-terestrateisdeterminedatthelaunchofthebondandstaysfixedduringthebond'slifetime. Thefolloplesarketinterestratesaffectbondprices. Let'scalculatethepriceofatakesthebondattractivetoinvestors.Applyingthepresentvalueformulatoobtainthepriceofthebond:- PresentValue=
5、〔$8/(1+5%)〕+〔$8+$100/(1+5%)2.〕=$105.58 Averyimportantpointtonoteistheinverserelationshipbetinator)andprice.Ariseininterestratesaturitybondsaretypicallylessprice-sensitivetointerestratechangesthanlongmaturitybonds.Inge-neral,thepricesensitivityofatesmoresensitivetointerestratesthan
6、aone-yearfixedinebond.Thelongerthematurity,thehigherthepricesensitivityofthebondtointerestratechanges. Afixedinebondinvestorhastounderstandthesetple,ifaneconomyisundergoingasevererecession,thereisagreaterchancefortheCentralBanktoreduceinterestrates.Ifinterestratesfall,bondprices-p
7、les.Thepricesoflongermaturityfixedinebondsorethanshortermaturitybonds.Hence,afixedineinvestorarketinterestratestofallshouldinvestinlongermaturityfixedinebondstomaximisepriceappreciation. Ontheotherhand,iftheeconomyhasbeenboomingandinflationishigh,thereisagreaterchancethattheCentra
8、lBankaturitybondstoavoidheavierpr
