Overview of Bond Market

Fixed Income Markets
Session -1&2
Bond Market: An Overview
Basic Features of Bonds
Risks Associated with Bonds
Description of a Bond: ABC Co.

Price:
91.97
Coupon (%):
10.0%
Maturity Date:
9-Sept-2035
Yield to Maturity (%):
11%
Face Value:
1000
Fitch Ratings:
BB
Coupon Payment Frequency:
Semi-Annual
First Coupon Date:
9-March-2016
Type:
Corporate
Callable:
No
The Bond Indenture

The bond indenture is a three party contract between the bond
issuer, the bondholder, and the trustee
The promises of the issuer and the rights of the bondholders
are set forth in detail in the bond indenture
Bond indenture describes:
Basic terms of the bond issued

Total amount of bonds issued
Description of the security
Repayment arrangements
Details of Call/put provisions if any
Details of the affirmative and negative covenants

Affirmative covenants set forth what the borrower has promised to do
Negative (or restrictive covenants) set forth certain limitations and restrictions
on the borrowers activities
Sectors of the U.S. Bond Market

Treasury sector securities issued by the U.S.
government
Agency sector securities issued by federally related
institutions and government-sponsored enterprises
Municipal sector securities issued by state and
local governments bonds (Similar to State
Development Loans in Indian context)
Sectors of the U.S. Bond Market

Corporate sector securities issued in the U.S. by
U.S. corporations and foreign corporations
Asset-backed sector securities backed by a pool of
assets
Mortgage sector securities backed by mortgage
loans
Overview of Bond Features
Type of Issuer
Term to Maturity
Principal and Coupon Rate
Amortization Feature
Embedded Options
Overview of Bond FeaturesContd

Type of Issuer there are three issuers of bonds
The government and its agencies
Municipal/State governments
Corporations (domestic and foreign)
Term to Maturity refers to the date that the issuer

will redeem the bond by paying the principal
There may be provisions in the indenture that allow either
the issuer or bondholder to alter a bonds term to maturity
(ex. Callable bonds).

Principal and Coupon Rate
Zero-Coupon Bond interest is paid at the maturity with
the exact amount being the difference between the principal
value and the price paid for the bond
Floating-rate bonds issues where the coupon rate resets
periodically (the coupon reset date) based on the coupon
reset formula given by: reference rate + quoted margin
Linkers bonds whose interest rate is tied to the rate of
inflation
Inverse-floating-rate bonds coupon interest rate moves in

the opposite direction from the change in interest rates

Amortization Feature the principal repayment of a
bond issue can call for either
(i) the total principal to be repaid at maturity or
(ii) the principal repaid over the life of the bond
In the latter case, there is a schedule of principal

repayments called an amortization schedule.
For amortizing securities, a measure called the
weighted average life or simply average life of a
security is computed.
10

Embedded Options it is common for a bond issue
to include a provision in the indenture that gives
either the bondholder and/or the issuer an option
Call provision - grants the issuer the right to retire the debt,
fully or partially, before the scheduled maturity date
Put provision - gives the bondholder the right to sell the
issue back to the issuer at par value on designated dates
Convertible bond - provides the bondholder the right to
exchange the bond for shares of common stock
Exchangeable bond - allows the bondholder to exchange
the issue for a specified number of common stock shares of
a corporation different from the issuer of the bond
11
Coupon Rate Terminology

When describing a bond, it is typical to state the
coupon rate and the maturity date
For example, the expression 7s of 12/05/2018 means a
bond with a 7% coupon rate maturing on 12May 2018
Usually coupons are paid semiannually

For 7% of 12/05/2018 security coupon payments will be
paid on 12-May and 12-Nov of every year till the
redemption of the security i.e. till 12/05/2018
12
Coupon Rate TerminologyContd

Zero-coupon bonds do not make periodic coupon
payments
Mortgage- and asset-backed securities typically pay
interest and principal monthly
Step-up bonds have a coupon rate that increases over
time
For example: a 5 year bond might have
A 6% coupon rate in year 1
A 6.5% rate in year 2
A 7% rate in year 3, and a 8% rate thereafter
13

A floating-rate security is an issue whose coupon rate
resets periodically
Coupon rate = reference rate + quoted margin
E.g., Coupon rate = LIBOR + 100bps
A floating-rate security may have a cap, which sets

the maximum coupon rate that will be paid, and/or a
floor, which sets the minimum coupon rate that will
be paid
A cap is a disadvantage to the bondholder while a
floor is an advantage to the bondholder
14

Inverse Floaters
Usually the coupon formula for a floating rate bond moves
in the same direction as the reference rate; however, inverse
or reverse floaters move in the opposite direction
The coupon formula for an inverse floater is:

Coupon rate = K - L * reference rate
K is set in the indenture and is a fixed interest rate (e.g., 10%)
L is a multiplier (e.g., 2), it is also set in the indenture
Reference rate could be the LIBOR, T-bill rate etc.
Suppose that on the reset date if the LIBOR is 4%, the

coupon rate would be
=10% - (2 * 4%) or 2%.
15
Inflation Protected Bonds

Treasury Inflation Protected Securities (e.g., TIPS)
These bonds provide protection against inflation
The coupon rate, also called the real rate, on a TIPS is set at a
fixed rate determined through auction
The principal value, called inflation adjusted principal, is
adjusted semiannually and hence the coupon payments and the
maturity value
At maturity, investors received the greater of the inflationadjusted principal amount or the par value
Investors are protected against the loss of principal amount
RBI issued inflation indexed bonds in 1997 , 2004 & 2013

These bonds are very popular in US, UK and other markets
In UK, inflation-indexed bonds account for more than 40% of
outstanding government debt
16
Inflation Indexed National Savings Securities - C

IINSS - Cumulative
These bonds provide protection against inflation
The coupon rate 1.5% per year above the rate of inflation
as measured by the consumer price index (CPI)
Not attractive for the investors in higher income brackets
Interest rate : reset every six months
Principal is not fixed (issue price 5000)
Redemption 10 years,
Lock-in period 3 years, (1-year for senior citizens) with a
penalty of half of the interest earned in last six months
17
Inflation Protected Bonds : Example

An investor invested Rs. 10,000 in a inflation protected bond
with coupon rate 3% and two years maturity. During the first
year the inflation rate observed was 6% and for the next year it
was 7%. Estimate the payments receivable by the investor.
Principal*
Coupon^
Due
Payments
receivable
Period
Years
From
Principal
Due
Years
To
0.0
10000.00
0.5
10300.00
154.50
154.50
0.5
10300.00
1.0
10609.00
159.14
159.14
1.0
10609.00
1.5
10980.32
164.70
164.70
1.5
10980.32
2.0
11364.63
170.47
11535.10
*Principal at the end of half year = Principal amount at the beginning*(1+semiannual inflation
rate)
^Coupon payment =Principal*Coupon rate/2

Note: Semiannual inflation rate may be taken as annual inflation rate/2
Inflation Protected Bonds : Example 2

An investor invested Rs. 100,000 in a inflation protected bond
with coupon rate 5% and two year maturity. Annualized
inflation rate observed was 6%. Estimate the payments
receivable by the investor at the end of 3rd period.
Principal amount at the end of half year = Principal amount at
the beginning*(1+semiannual inflation rate)
Coupon=Principal*Coupon rate/2
19
Separate Trading of Registered Interest and

Principal of Securities
When a Treasury fixed-principal bond is stripped,
each interest payment and the principal payment
becomes a separate zero-coupon security
Each component has its own identifying number and
can be held or traded separately
Example:
A bond with 5 years maturity, consists of a single principal
payment at the end of 5th year and 10 interest payments, one
every six months for 5 years.
When this bond is converted to STRIPS, each of the 10 interest payments
and the principal payment becomes a separate zero coupon security.
STRIPS are also called zero-coupon securities

20
Pricing a Bond
Determining the price of any financial instrument
requires an estimate of
the expected cash flows
the appropriate required yield
the required yield reflects the yield for financial
instruments with comparable risk, or alternative
investments
The cash flows for a bond that the issuer cannot retire
prior to its stated maturity date consist of
periodic coupon interest payments to the maturity date
the par (or maturity) value at maturity
21
Pricing a Bond
In general, the price of a bond (P) can be computed
using the following formula:
P = price (in dollars)

n = number of periods (number of years times 2, if interest
paid semiannually)
t = time period when the payment is to be received
C = semiannual coupon payment (in dollars)
r = periodic interest rate (required annual yield divided by 2)
M = maturity value
22
Pricing a Bond
Present Value of an Ordinary Annuity
When the same amount of money is received (or paid) each
period, it is referred to as an annuity.
When the first payment is received one period from now,
the annuity is called an ordinary annuity.
23
Pricing of a bond
Consider a 20-year 10% coupon bond with a par
value of $1,000 and a required yield of 11%.
Compute the price of the bond.
Zero-Coupon Bond
Consider the price of a zero-coupon bond (P) that
matures 15 years from now, if the maturity value is
$1,000 and the required yield is 9.4%.
Given M = $1,000, r = 0.094 / 2 = 0.047, and n =
2(15) = 30, what is P ?
24
Price-Yield Relationship
A fundamental property of a bond is that its price
changes in the opposite direction from the change in
the required yield.
The reason is that the price of the bond is the present value
of the cash flows.
If we graph the price-yield relationship for any option-free
bond, we will find that it has the bowed shape.
25
Bond Prices and Interest Rates
Bond Price
Non-linear inverse relationship between bond price and interest rate

Longer term bonds are more sensitive to changes in interest rates than
shorter term bonds
Yield (r)
26
Relationship Between Coupon Rate, Required

Yield, and Price
When yields in the marketplace rise above the coupon
rate at a given point in time, the price of the bond falls
so that an investor buying the bond can realizes
capital appreciation.
The appreciation represents a form of interest to a new
investor to compensate for a coupon rate that is lower than
the required yield.
When a bond sells below its par value, it is said to be
selling at a discount.
A bond whose price is above its par value is said to be
selling at a premium.
27

Yield, and Price
For a bond selling at par value, the coupon rate equals
the required yield.
As the bond moves closer to maturity, the bond continues
to sell at par.
Its price will remain constant as the bond moves toward the
maturity date.
28

Yield, and Price
The price of a bond will not remain constant for a
bond selling at a premium or a discount.
The discount bond increases in price as it approaches
maturity, assuming that the required yield does not change.
For a premium bond, the opposite occurs.
For both bonds, the price will equal par value at the
maturity date.
29
Reasons for the Change in the Price of a Bond

The price of a bond can change for three reasons:
there is a change in the required yield owing to changes in
the credit quality of the issuer
there is a change in the price of the bond selling at a
premium or a discount, without any change in the required
yield, simply because the bond is moving toward maturity
there is a change in the required yield owing to a change in
the yield on comparable bonds (i.e., a change in the yield
required by the market)
30
Bond Prices and Interest Rates

Bond price = par value,
If coupon rate is equal to the yield required by the market.
Bond price < par value (at a discount)

If coupon rate is below the yield required by the market.
Bond price > par value (at a premium)

If coupon rate is above the yield required by the market.
31
Advantages of Bonds over Stocks

Bonds, while a more conservative investment than
stocks, can offer certain investors some very
attractive features:
Safety
Reliable income
Potential for capital gains
Diversification (especially for an otherwise all-equity
portfolio)
32
Safety of Bonds
The safety of bonds derives mainly from two things:
Bondholders are in line ahead of both preferred and
common stockholders for payment. Thus, if a firm falls on
hard times, it must first pay its bondholders while
stockholders may see dividends cut.
In the event that a company skips a payment or violates
covenants of the indenture, the creditors may force it into
bankruptcy to protect the value of their investment.
Stockholders have no such right.
33
Reliability of Income
The safety of bonds derives mainly from two things:
Most bonds are fixed-income securities. As such, they
promise a fixed set of interest payments and the return of
the principal at maturity.
Investors can count on receiving their interest payments in
full and on time, except in the event of severe financial
distress. Common stockholders can never be sure of the
exact amount (and sometimes the exact timing) of
dividends.
Bonds that are callable do not offer as much reliability,
though it has less risk than stocks.
34
Risk Associated with investing in Bonds
Investment risk is the uncertainty that the actual rate

of return realized from an investment will differ
from the expected rate
35
Risk Associated with investing in Bonds
Interest-rate Risk/Market Risk

Reinvestment Risk
Call Risk
Credit Risk
Inflation Risk
Exchange Rate Risk
Liquidity Risk
Volatility Risk
Risk Risk
36
Interest Rate/Market Risk

Market Risk is the uncertainty that the realized return
will deviate from the expected return because of interest
rate changes
The return on a bond comes from:
Coupons
Interest earned from reinvesting coupons: interest on interest
Capital gains or losses
A change in rates has two-effects on a bond returns: price

effect and interest on interest effect which leads to the
price risk and reinvestment risk
37
Risk Associated with investing in BondsContd

Interest-rate Risk
Interest-rate risk or market risk arises when
investment horizon differs from the maturity date.
An increase in interest rates will mean the realization
of a capital loss because the bond sells below the
purchase price.
Interest-rate risk is by far the major risk faced by an
investor in the bond market.
38
39
Market Risk : Example -1

Consider the following case:
An investor with an investment horizon of 12 years buys a
GS 9.85 16th Oct, 2015, (issued in Oct 2001) bond on 31st
Oct, 2003 @ 140.25 with current yield 5.27%.
If the interest rates remains fixed @ 5.27%, then the investor would
realize a rate of return of 5.27%
Suppose investor have an investment horizon of five years.
Calculate the expected price of the bond after five years.
Have you made any assumption?
Download the historical price of the bond and comment on the realized
returns.
40
Market Risk : Example -1

Consider the following case:
An investor with an investment horizon of 12 years buys a
GS 9.85 16th Oct, 2015, (issued in Oct 2001) bond on 31st
Oct, 2003 @ 140.25 with current yield 5.27%.
If the interest rates remains fixed @ 5.27%, then the investor would
realize a rate of return of 5.27%
Suppose investor have an investment horizon of five years.
Calculate the expected price of the bond after five years.
Have you made any assumption?
Download the historical price of the bond and comment on the realized
returns.
41
Spread 10Year 2Year bond (USA)
42
Spread 10Year 2Year bond (USA)
43
Key-features Impacting Interest Rate Risk

The features of a bond that affect interest rate risk:
Maturity
All else the same: longer the bonds maturity, the greater the bonds
price sensitivity to changes in market interest rates
The reason: the time value of money
Coupon rate
For a given maturity: lower the coupon, the greater the price change
Zero-coupon bond: all else the same, has a greater price change
than a coupon-bearing bond
44
Interest Rate Risk

The impact of yield level
Sometimes credit considerations cause different bonds to
trade at different yields even if they have the same coupon
and maturity
The higher a bonds yield, the lower the bonds price
sensitivity, all else the same
Floating rate securities

For floating rate bonds, the coupon rate is reset periodically based
on market interest rates (reference rates plus a quoted margin)
Note: the quoted margin is set for the life of the bond in the
indenture. Therefore, the price of a floating-rate bond depends on:
The length of time between the coupon resetting dates
The investors required margin
Whether the bond has a cap/floor rate
45
Interest Rate Risk

Consider a 20-year 10% coupon bond with a par
value of $1,000 and a required yield of 11%.
Suppose your investment horizon is 2 years, what is
your expected rate of return?
Further suppose that yield rate increases to 12%
immediately after purchasing the bond, what will be
your realized return?
46
Measuring Interest Rate Risk

Approximate Percentage Price Change
Duration (crude measure)
Change in percentage price for a change of 100 bps in
yield
Duration = [Price (if yields decline) Price (if yields
rise)] / [2 X Initial Price X Change in Yield (in %)]
If the estimated duration is 10.44 basis, then this means that
for a +/- 1% (or 100bps) change in market rates, this
bond would change in price by -/+ 0.1044%
A 50 basis point change would be 0.1044%/2 or
0.0522%
47
Measuring Interest Rate Risk

Approximate Dollar Price Change
Dollar duration
The approximate dollar price change for a 100 bps in
yield
Dollar duration = market value of bond * duration
48

Reinvestment Risk
Reinvestment risk is the risk that the interest rate at
which interim cash flows can be reinvested will fall.
Reinvestment risk is greater for longer holding
periods, as well as for bonds with large, early, cash
flows, such as high coupon bonds.
It should be noted that interest-rate risk and
reinvestment risk have offsetting effects.
49

Call Risk
Call risk is the risk that the issuer may retire full or a
part of the bond when interest rates fall.
For investors, there are three disadvantages to call
provisions:
cash flow pattern cannot be known with certainty
investor is exposed to reinvestment risk
bonds capital appreciation potential will be reduced
50
Call Risk
When a bond is called the holder receives the call price
(CP). Since the CP usually exceeds the principal, the
return the investor receives over the call period is often
greater than the initial YTM
The investor, though, usually has to reinvest in a market
with lower rates (as per investment horizon) that often
causes his return for the investment period to be less than
the initial YTM
Because of the call risk, investors demand a risk premium
called call risk premium
Call risk premium is greater in higher interest rate periods
51
Call Risk: Example

Suppose, a bond with maturity 5 years and coupon rate 10% is
trading at par,
the bond can be called at the end of second/third/fourth year at
call price 110/108/106.
An investor with an investment horizon of five years invest in
the above bond and expecting yield of 10%.
But interest decreases to 6% at the end of second year and
bond is called. Estimate the loss to the investor. Coupons are
paid annually.
52
Call Risk: ExampleContd

If interest rate remains at 10% and the bond is not called
the expected return for the investor would be 10% (Scenario I)
If the bond called and the interest rate decline to 6% (Scen II)
As the call price> the buy price, there will be capital gain of (110100) 10
But, investor will loss some amount because of the reinvestment
risk, i.e. now, he has to invest the principal and coupon payments
received @ 6% instead of 10% from 3rd year to 5th year
53
Call Risk: ExampleContd

Suppose, a bond with maturity 5 years and coupon rate 10% is
trading at par, the bond can be called at the end of second year
at call price 110. If the rate of interest decreases to 6% at the
end of second year and bond is called. Estimate the expected
loss expected by the investor. Coupons are paid annually.
Period
Cash
Flow
Scenario I
-1000
100
100
100
100
1100
Scenario II
-1000
100
1200
Amount expected to be received at the end of 5th year

Scenario I
=100*(1.1)^4+100*(1.1)^3+100*(1.1)^2+100*(1.1)+1100
=1610.51
Scenario II
=100*(1.1)*(1.06)^3+1200*(1.06)^3
=1560.23

Credit Risk/Default Risk
Credit risk is the default risk that the bond issuer will
fail to satisfy the terms of the obligation with respect
to the timely payment of interest and principal.
Credit spread is the part of the risk premium or
spread attributable to default risk.
Credit spread risk is the risk that a bond price will
decline due to an increase in the credit spread.
55
Source:Soloman YieldBook,CreditRiskofGMBond
56

Graph presents the GM yield spread over Benchmark Tyield
Spread shows the extra compensation required by the
investors while investing in GM bond instead of T-bond
In 2001, Moddy Rating A3
In 2003 to 2005 GM rating fell down from A3 to lower and
lower, resulted increase in credit spread
In 2005, spread reduces better market sentiments and
falling risk premium
Because of financial distress credit spread increases after
2007
57
Reducing Credit Risk

A sinking fund provision requires that the issuer retire a
specified portion of an issue each year
The purpose of the provision is to reduce credit risk
To lower the credit risk, bonds may be backed by collateral

(secured) may be preferred or protective covenants may be
added
58

Inflation Risk
Inflation risk arises because of the variation in the
value of cash flows from a security due to rises in
purchasing power.
If investors purchase a bond on which they can
realize a coupon rate of 7% but the rate of inflation is
8%, the purchasing power of the cash flow falls.
59

Inflation Risk
For all but floating-rate bonds, an investor is exposed
to inflation risk because the interest rate the issuer
promises to make is fixed for the life of the issue.
Nominal debt security only compensates for the
expected inflation rate at the time it was issued.
60

Exchange-Rate Risk
Exchange-rate risk refers to the unexpected change in
one currency compared to another currency.
From the perspective of a U.S. investor, a nondollardenominated bond (i.e., a bond whose payments
occur in a foreign currency) has unknown U.S. dollar
cash flows.
The dollar cash flows are dependent on the exchange
rate at the time the payments are received.
The risk of the exchange rate causing smaller cash
flows is the exchange rate risk or currency risk.
61
62

Liquidity Risk
Liquidity risk or marketability risk depends on the
ease with which an issue can be sold at or near its
value.
The primary measure of liquidity is the size of the
spread between the bid price and the ask price quoted
by a dealer.
The wider the dealer spread, the more the liquidity
risk.
63
Features of a Developed Bond Market

Liquidity
Liquidity is the ease with which an investor can buy or sell
immediately at a price close to the mid quote. A liquid
market should have following characteristics:
Tightness: indicates the cost of turning around a position during a
short period which should be low. A tight market has very low bidask spread
Depth: A market is said to be deep if only the large trades can
affect the price
Resiliency: Market prices should reflect fundamental value of the
asset and should return to the fundamental value quickly after the
shock
64
Measuring liquidity: Impact cost

Impact cost
Impact cost represents the cost of executing a transaction in
a given stock/bond, for a specific predefined order size, at
any given point of time
Buyer/seller pays the cost for immediacy
Therefore the price of the Secs. deviates from the fair price
depending upon the availability of the trade or market
depth
This transaction cost is reflected in the impact cost
Impact cost = (Actual buy price Ideal buy price)*100 / Ideal Price
65
Measuring liquidity: Impact cost..Contd

Limitations
Impact cost is separately computed for buy and sell
Impact cost may vary for different transaction sizes
66
Measuring liquidity: Impact cost..Contd

Example:
Buy
From the available order

book for a security 8% GS
2014, compute the impact
cost for a buyer who want to
buy 1000 qty. of the security
Sell
Quantity
Price
Price
Quantity
100
90.25
90.75
100
100
90.20
90.80
500
200
90.10
91.00
400
500
90.00
91.20
300
600
89.80
91.30
500
Sol:
Actual buy price =(100*90.75+500*90.80+400*91.00)/(100+500+400)
= 90.875
Ideal Price
Impact cost
= (90.25+90.75)/2
=90.50
= (90.875-90.50)*100/90.50
=0.4144%
67
Off the run vs On the run issue
Source:Barclay,MichaelJ.,TerrenceHendershott,andKennethKotz."Automationversusintermediation:
EvidencefromTreasuriesgoingofftherun." TheJournalofFinance 61.5(2006):23952414.
68

Risk Risk
Risk risk refers to not knowing the risk of a security.
Two ways to mitigate or eliminate risk risk are:
Keep up with the literature on the state-of-the-art
methodologies for analyzing securities
Avoid securities that are not clearly understood
69

Volatility Risk
Volatility risk is the risk that a change in volatility
will adversely affect the price of a bond.
The value of an option rises when expected interestrate volatility increases.
For example, consider the case of a callable bond
where the borrower has an embedded option, the
price of the bond falls when interest rates fall due to
increased downward volatility in interest rates.
70
Other Risk
Event Risk: Occasionally an issuer is unable to make
either interest or principal payments because of
unexpected events
A natural catastrophe or disaster, such as a hurricane or
industrial accident
A corporate takeover (LBOs) or restructuring that prevents
the issuer from making timely payment
Sovereign risk: As the result of the actions of a

foreign government, such as: Currency revaluations,
political change, or war, there may be either a default
or an adverse price change in the bond price
71
Thank You!
72

Overview of Bond Market

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Overview of Bond Market

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Fixed Income Markets

Bond Market: An Overview

Basic Features of Bonds

Risks Associated with Bonds

Description of a Bond: ABC Co.

Yield to Maturity (%):

Coupon Payment Frequency:

First Coupon Date:

The Bond Indenture

Basic terms of the bond issued

Details of the affirmative and negative covenants

Sectors of the U.S. Bond Market

Sectors of the U.S. Bond Market

Overview of Bond Features

Overview of Bond FeaturesContd

Term to Maturity refers to the date that the issuer

Overview of Bond FeaturesContd

Inverse-floating-rate bonds coupon interest rate moves in

Overview of Bond FeaturesContd

In the latter case, there is a schedule of principal

Overview of Bond FeaturesContd

Coupon Rate Terminology

Usually coupons are paid semiannually

Coupon Rate TerminologyContd

Coupon Rate TerminologyContd

A floating-rate security may have a cap, which sets

Coupon Rate TerminologyContd

The coupon formula for an inverse floater is:

Suppose that on the reset date if the LIBOR is 4%, the

Inflation Protected Bonds

RBI issued inflation indexed bonds in 1997 , 2004 & 2013

Inflation Indexed National Savings Securities - C

Inflation Protected Bonds : Example

^Coupon payment =Principal*Coupon rate/2

Inflation Protected Bonds : Example 2

Separate Trading of Registered Interest and

STRIPS are also called zero-coupon securities

P = price (in dollars)

Bond Prices and Interest Rates

Non-linear inverse relationship between bond price and interest rate

Relationship Between Coupon Rate, Required

Relationship Between Coupon Rate, Required

Relationship Between Coupon Rate, Required

Reasons for the Change in the Price of a Bond

Bond Prices and Interest Rates

Bond price < par value (at a discount)

Bond price > par value (at a premium)

Advantages of Bonds over Stocks

Risk Associated with investing in Bonds

Investment risk is the uncertainty that the actual rate

Risk Associated with investing in Bonds

Interest-rate Risk/Market Risk

Interest Rate/Market Risk

A change in rates has two-effects on a bond returns: price

Risk Associated with investing in BondsContd

Risk Associated with investing in BondsContd

Market Risk : Example -1

Market Risk : Example -1

Spread 10Year 2Year bond (USA)

Spread 10Year 2Year bond (USA)

Key-features Impacting Interest Rate Risk

Interest Rate Risk

Floating rate securities

Interest Rate Risk