Consider a $1,000 bond with a fixed-rate 10 percent annual coupon (Cpn %) and a maturity (N) of 10 years. The bond currently is trading to a market yield to maturity (YTM) of 10 percent. Complete the following table.
From Par, $ From Par, %
N Cpn % YTM Price Change in Price Change in Price
10 10% 9% 1,065.04 65.04 6.504%
10 10% 10% $ 1,000.00 0 0
10 10% 11%
Use the information to verify the three principles of interest rate-price relationships for fixed-rate financial assets.
Rule One: Interest rates and prices of fixed-rate financial assets move inversely.
Consider a $1,000 bond with a fixed-rate 10 percent annual coupon (Cpn %) and a maturity (N) of 30 years. The bond currently is trading to a market yield to maturity (YTM) of 10 percent. Complete the following table.
From Par, $ From Par, %
N Cpn % YTM Price Change in Price Change in Price
30 10% 9%
30 10% 10%
30 10% 11%
Use the information to verify the three principles of interest rate-price relationships for fixed-rate financial assets.
Rule Two: The longer is the maturity of a fixed-income financial asset, the greater is the change in price for a given change in interest rates.
Rule Three: The change in value of longer-term fixed-rate financial assets increases at a decreasing rate.