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Bonds and Interest Rates - Essay Example

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From the essay "Bonds and Interest Rates" it is clear that bond price and interest rates have an inverse relationship. When interest rates go up compared to the coupon rate, bond prices would fall in the market and when interest rates fall, bond prices would go up…
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Bonds and Interest Rates
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Download file to see previous pages When interest rates go up compared to the coupon rate, bond prices would fall in the market and when interest rates fall, bond prices would go up.  Bond price and interest rates have an inverse relationship. When interest rates go up compared to the coupon rate, bond prices would fall in the market and when interest rates fall, bond prices would go up.  2. The calculations involved with pricing a bond and a stock a) A bond is priced by converting the future cash flows from the coupon rate and the maturity payment to their present value. The discount rate for calculating the present value is the investor’s required yield. The formula is shown below. An Excel worksheet has PV calculation as a built-in macro. Bond Price =   C / (1+r)) + C / (1+r) 2 ……………  C / (1+r) n   + M / (1+r) nWhere,   ‘C’ is the Coupon rate                 ‘n’ are the number of payments                 ‘r’ is investor’s required yield                 M is the maturity value of the bond     b) The price of a stock is determined using the Dividend Discount Model where the future dividends to be paid out by the company are discounted to a present value. An assumption often made is that there would be a growth in the rate of payment of dividends as the company grows in the future. ...Download file to see next pagesRead More
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