Howdoesinterestrateaffectthepriceofbonds-分析和总结分析和总结.pdfVIP

Howdoes interest rate affect the price of bonds? ● 郭志明 By Vincent Kok There is a relationship between bond prices and interest rates, and the maturity of a bond has an impact on its pricesensitivity to interest rates. This article examines the relationship. A dollar today is worth more than a dollar in the future, simply because a dol-lar today can be deposited into a bank ac-count to earn interest. If one-year interest rates are 5%, the $1 received today and deposited into the bank account would be worth $ in a year ‘s time. $1 today is also known as the present value of the $ expected in a year, given the one-year interest rates of 5%.The relationship between present value, future value and interest rates is given by the simple discounting formula :- Present Value = sum of future cashflows / (1+interest rate) In our earlier example, the present val-ue of $1 was therefore obtained from:- =$/ (1+5%) =$ A bond holder receives a stream of interest, or coupons for owning the bond and gets back his principal on maturity of the bond. In order to receive these streams of future cashflows, the pros-pective bond holder pays a price to the issuer of the bond. The price paid upfront is the present value of all the future cash-flows of coupons and principal on matu-rity, discounted at the appropriate interest rate, which is also known as the yield to maturity (YTM) of the bond. The YTMis the current market interest rates, which could differ