Wednesday, April 16, 2008

Corporate Bond Pricing Theorems

The following are the three most important Bond Theorems that apply to government, municipal, and corporate bonds:

1) Bond prices will vary inversely with yields
– an increase in yields leads to a decrease in bond prices

2) Bond price volatility is greater for longer bonds
– bond price volatility is the percentage change in a bond's price for a certain change in its yield

3) Bond price volatility is much higher for bonds with lower coupon rates.

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