Three important relationships of bond valuation

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Reference no: EM131934701

Article 1 : Investing in Funds &ETFs: A Monthly Analysis -6 Questions for Bond Investors: As interest rates rise, finding the right fixed-income strategy is crucial By Pollock, Michael A . Wall Street Journal , Eastern edition; New York, N.Y. [New York, N.Y]08 May 2017:R.1.

Article 2 : A Bond Market Plunge that Baffles the Experts By James B. Stewart

The two articles attached must be mentioned. Also refer to the following definitions as it can help answer the question.

Bond Valuation: Three Important Relationships

(1) First relationship

The intrinsic value of a bond is inversely related to its required rate of return. Since the required rate of return depends positively on the market interest rate, we can infer that as market interest rate increases (decreases), bond value decreases (increases).

The change in value caused by changing interest rates is called interest rate risk.

(2) Second relationship

If the bondholder's required rate of return equals the coupon interest rate, the bond will be valued at par, or maturity value. This is said to "trade-at par".

If the required rate of return exceeds the bond's coupon rate, the bond will be valued below par or at a "discount." This is called a discount bond.

If the required rate of return is less than the bond's coupon rate, the bond will be valued above par or at a "premium." This is called a premium bond.

(3) Third relationship

Longer-term bonds are exposed to greater interest rate risk than shorter-term bonds.

Reference no: EM131934701

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