Interest Rates. Chapter 4. Valuing Debt. In 1945, U.S. Treasury bills offered a return of 0.4%. At their 1981 peak, they offered a return of over 17%. Why does the same security offer radically different yields at different times?. Valuing Debt.
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YARDSTICK FOR COMPARING
DIFFERENT TYPES OF
SECURITIES AND MATURITIES.
C1 C2 C3 Cn + Fn
P = + + + … +
(1 + r)1 (1 + r)2 (1 + r)3 (1 + r)T
$80 $80 $1080
P = + +
(1.10)1 (1.10)2 (1.10)3
Coupon rate = $80/$1000 = 8.0%
Current yield = $80/$950.24 = 8.42%
YTM = 10%
P = F / (1 + r)T
High Coupon Bond
Low Coupon BondCoupon Rate and Bond Price Volatility
Consider two otherwise identical bonds.
The low-coupon bond will have much more volatility with respect to changes in the discount rate
Real interest rate = Nominal rate – Inflation rate