BUS 422 Chapter Notes - Chapter 10-11: Interest Rate Risk, Investment, Interest Rate
20 Jul 2020
School
Department
Course
Professor
Document Summary
Interest rates are the primary driver of bond prices and therefore returns (have the largest impact on) Interest rates are inversely related to bond prices. Long bonds carry more if interest rates increase, long bonds decrease more than short bonds. Possibility of having to reinvest at a lower rate. Long or short is not based on maturity, Measured by duration (economic life of a bond) Better measure of the price sensitivity for more significant changes in interest rates. Will always be less than time to maturity for a coupon bond. Measures the weighted average life a security. Measures the economic life of a bond. It tells us the difference between the effective lives of alternative bonds. It is a measure of bond price sensitivity to interest rate movements (direct measure of interest rate risk) Estimate price changes in bonds for small changes in interest rates. Good at estimated price sensitivity for small movement in interest rates.
