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Describe the relationship between interest rates and bond values. If investors required rate of return decreases, what

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Describe the relationship between interest rates and bond values. If investors’ required rate of return decreases, what should happen to the value of bonds? Would this bond be purchased at a premium or discount? How did you make this determination?
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There is an inverse relationship between interest rates and bond values When interes...View the full answer


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Personal Finance Turning Money into Wealth

Personal Finance Turning Money into Wealth

ISBN: 978-0133856439

7th edition

Authors: Arthur J. Keown

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Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.

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