© 2012 McGrawHill Ryerson Ltd. Chapter 6 -

A graph of the relationship between time to maturity and yield to maturity, for bonds that differ only in their maturity dates

1LO3, LO4

© 2012 McGrawHill Ryerson Ltd. Chapter 6 -

Real Return Bond: The bonds with variable nominal coupon payments, determined by a fixed real coupon payment and the inflation rate

Fisher Effect: The nominal interest rate is determined by the real interest rate and expected rate of inflation

Expectations Theory: An explanatory theory that shows why there are different shapes of the yield curve

2LO3, LO4

© 2012 McGrawHill Ryerson Ltd. Chapter 6 -

Interest rate risk is the risk in bond prices due to fluctuations in interest rates

Different bonds are affected differently by interest rate changes

Longer term bonds get hit harder than the shorter term bonds. Lower coupon bonds get hit harder than bonds with higher coupons

Liquidity Premium

3LO3, LO4

© 2012 McGrawHill Ryerson Ltd. Chapter 6 -

-

500

1,000

1,500

2,000

2,500

3,000

YTM

$ B

on

d P

ric

e

3 yr bond

30 yr bond

When the interest rate equals the 6.5% coupon rate, both bonds

sell at face value

4LO3, LO4