Relationship between bond price and term to maturity

The Relationship Between Bonds and Interest Rates- Wells Fargo Funds

relationship between bond price and term to maturity

Duration is expressed in terms of years, but it is not the same thing as a bond's maturity date. That said, the maturity date of a bond is one of the key components . general relationship. In his important book on the term struc- ture, Burton Malkiel specifies the above rela- tionship between bond prices and maturity. bonds. (Many bonds pay a fixed rate of interest throughout their term; interest payments is to provide investors with a better understanding of the relationship among market interest rates, bond prices, and yield to maturity of treasury bonds, .

Bond Price Function The price or market value of an investment bond is based on the rate of interest the bond pays -- called the coupon rate -- compared to the current market yield for similar bonds. If a bond's coupon rate is higher than market rates, the value of the bond will be higher than the face amount to bring the yield an investor earns in line with current rates.

  • Bond price relations
  • Duration: Understanding the relationship between bond prices and interest rates
  • The Relationship Between Bonds and Interest Rates

This is called a premium bond. A discount bond is priced below the face amount, because the bond's coupon rate is lower than current market rates.

Bond prices move inversely to interest rate changes. Factors Affecting Price Volatility Two features of bonds affect the price volatility in response to changes in market interest rates. A bond with a lower coupon rate will be more volatile than a bond with a higher coupon rate.

Bond Price Relations - Fidelity

Also, longer-term bonds are more volatile than bonds with a shorter time to maturity. Volatility in this case is the amount a bond's price changes in response to a specific change in interest rates.

Bond Duration The mathematical concept of bond duration can be used as a measure of the volatility or risk of a bond. Duration is similar to maturity but is a measure of the cash flow of a bond: Obviously, interest rates don't move this quickly, but let's say the moment after you buy that bond, or maybe to be a little bit more realistic, let's say the very next day, interest rates go up.

The Relation Between Time to Maturity & Bond Price Volatility | Finance - Zacks

If interest rates go up, let me do this in a new color. Obviously for something less risky, you would expect less interest.

relationship between bond price and term to maturity

Interest rates have gone up. Now, let's say you need cash and you come to me and you say, "Hey, Sal, are you willing to buy "this certificate off of me? I'll actually do the math with a simpler bond than one that pays coupons right after this, but I just want to give the intuitive sense.

Or you could just essentially say that the bond would be trading at a discount to par.

Relationship between bond prices and interest rates

Bond would trade at a discount, at a discount to par. Now, let's say the opposite happens. Let's say that interest rates go down. Let's say that we're in a situation where interest rates, interest rates go down. So how much could you sell this bond for? I'm not being precise with the math.

I really just want to give you the gist of it.

relationship between bond price and term to maturity

So now, I would pay more than par. Or, you would say that this bond is trading at a premium, a premium to par. So at least in the gut sense, when interest rates went up, people expect more from the bond. This bond isn't giving more, so the price will go down. Likewise, if interest rates go down, this bond is getting more than what people's expectations are, so people are willing to pay more for that bond.

Now let's actually do it with an actual, let's actually do the math to figure out the actual price that someone, a rational person would be willing to pay for a bond given what happens to interest rates. And to do this, I'm going to do what's called a zero-coupon bond. I'm going to show you zero-coupon bond. Actually, the math is much simpler on this because you don't have to do it for all of the different coupons. You just have to look at the final payment.

There is no coupon. So if I were to draw a payout diagram, it would just look like this.

Face value, Coupon and Maturity of Bonds - SmarterWithMoney

This is one year. This is two years. Now let's say on day one, interest rates for a company like company A, this is company A's bonds, so this is starting off, so day one, day one.

The way to think about it is let's P in this I'm going to do a little bit of math now, but hopefully it won't be too bad.

relationship between bond price and term to maturity

Let's say P is the price that someone is willing to pay for a bond. Let me just be very clear here. If you do the math here, you get P times 1. So what is this number right here? Let's get a calculator out. Let's get the calculator out.