© 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
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