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CHAPTER 8 Bonds and Their Valuation

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CHAPTER 8 Bonds and Their Valuation

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    8. Inflation example: Now 1-Year $100 ? $105 $1.50 ? $1.50 $100 ? $105 $1.50 ? $1.65

    14. Example: Interest Rate Risk (MRP) We have 3 bonds: All have $1000 Face Value All have 5% annual coupons All have $1000 due at maturity The maturities are: 1-year, 10-year, and 30-year. The current interest rate is 5%. Lets value this bond….

    15. Inputs: Pmt/year: payments per year (annual =1) N: number of coupon payments (i.e. maturity) I/yr: interest per period. PMT: size of the payment FV: value at the end of maturity (not incl pmt) PV: present value

    24. 1 minute: Think Why do we charge a premium on an inactively traded bond? (i.e. explain the liquidity premium).

    25. 1 minute: Think Why do we charge a premium on an inactively traded bond? (i.e. explain the liquidity premium). Explain this to your neighbor. (2 minutes)

    27. Requirements for a Yield Curve Theory When ST rates are low, the YC slopes up. When ST rates are high, the YC slopes down. The YC usually (almost always) slopes up. Rates on bonds of different maturities “tend” to move together.

    36. Segmented Markets Theory The markets for short and long term bonds are separate. Demand and Supply

    38. Preferred Habitat Theory Markets are “somewhat” segmented. Individuals have their preferred habitat for investing. Could be viewed as the expectations hypothesis. The expected rte + some risk premium to invest long term (add maturity risk).

    40. 1 minute: Think How does the Market Segmentation Theory explain an upward sloping yield curve? (in general term and specific).

    41. 1 minute: Think How does the Market Segmentation Theory explain an upward sloping yield curve? (in general term and specific). Explain this to your neighbor. (opposite person!) (2 minutes)

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