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© 2012 McGrawHill Ryerson Ltd. Chapter 6 -  A graph of the relationship between time to maturity and yield to maturity, for bonds that differ only in.

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Presentation on theme: "© 2012 McGrawHill Ryerson Ltd. Chapter 6 -  A graph of the relationship between time to maturity and yield to maturity, for bonds that differ only in."— Presentation transcript:

1 © 2012 McGrawHill Ryerson Ltd. Chapter 6 -  A graph of the relationship between time to maturity and yield to maturity, for bonds that differ only in their maturity dates 1 LO3, LO4

2 © 2012 McGrawHill Ryerson Ltd. Chapter 6 -  Real Return Bond: The bonds with variable nominal coupon payments, determined by a fixed real coupon payment and the inflation rate  Fisher Effect: The nominal interest rate is determined by the real interest rate and expected rate of inflation  Expectations Theory: An explanatory theory that shows why there are different shapes of the yield curve 2 LO3, LO4

3 © 2012 McGrawHill Ryerson Ltd. Chapter 6 -  Interest rate risk is the risk in bond prices due to fluctuations in interest rates  Different bonds are affected differently by interest rate changes  Longer term bonds get hit harder than the shorter term bonds. Lower coupon bonds get hit harder than bonds with higher coupons  Liquidity Premium 3 LO3, LO4

4 © 2012 McGrawHill Ryerson Ltd. Chapter 6 - 3 yr bond 30 yr bond When the interest rate equals the 6.5% coupon rate, both bonds sell at face value 4 LO3, LO4

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