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T5 (part): Bond Valuations Relationships - p.275-278 (Relationship Two…
T5 (part): Bond Valuations Relationships - p.275-278
Relationship Four (277)
The longer the bond maturity date the more significant the impact of YTM changes
Relationship One (275)
Inverse correlation to yield to maturity (YTM) interest rate
YTM Interest INCREASES = Bond value DECREASES
YTM Interest DECREASES = Bond value INCREASES
BECAUSE - the bond has the same PMT once issued and the PMT is based on the YTM interest rate, if the rate is 12% and PMT $120, then when the YTM = 15%, the bond will still only pay $120 whereas is issued today PMT would be $150, so the bond value is worth less, drops from $1000 to $899
Equally if the YTM drops to 9%, a new bond would pay $90, so a bond paying $120 is worth more ($1000 to $1116)
Relationship Two (276)
Bond 'market value' compared to 'face value'
Market value > face value IF YTM < coupon rate
Market value < face value IF YTM > coupon rate
Discount Bond = market value < face value
Premium Bond = market value > face value
Again this makes up for the fact that PMT is set and therefore bonds can have a PMT higher or lower than the current market would issue them at
The difference will either be a capital gain or loss
Relationship Three (276)
Regardless of being a 'Premium' or 'Discount' bond, the bond will move towards its face value as it gets closer to its maturity date - because that will be paid by the bond issuer regardless.
Note p.273 has a good 'Bond Valuation' summary table