10.2
How does bond pricing relate to what you learned about the time value of money in your first finance class?
Section 10.4:
Understand the convergence of bond prices through time – why is
this the case?
Section 10.5: This section is very important
conceptually. Most of your conceptual questions tested on this
chapter will come from this section
Know the different sources of risk for bonds
What are credit default swaps and how are they useful to understand
bond pricing?
Be able to read figure 10.10 – what do widening spreads between
bond types indicate?
Section 10.6: This section is also going to be more
conceptual
Know the difference between expectations theory and liquidity
preference
How are they different and when are they compatible?
What drives the slope of the yield curve?
What does an inverted yield curve signal according to expectations
theory? According to liquidity preference?
I can only answer 1 question at a time so I am answering 10.2.
Bond Pricing is completely related to the time value of the money.
The Bond Pricing Formula is :
where, is the nth coupon, F is the face value and r is the yield rate.
This formula is itself derived from the time value of money concept by first drawing the cashflows and then discounting each cashflow with the yield rate.
Please do rate me and mention doubts, if any, in the comments section.
10.2 How does bond pricing relate to what you learned about the time value of money...
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