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Understanding Bond Valuation, Yields, Duration & Price Dynamics

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Understanding Bond Valuation, Yields, Duration & Price Dynamics

1. Coupon Rate, Current Yield, Capital Gains & YTM

  • Coupon Rate: Fixed annual interest based on face value.
  • Current Yield: Current Yield = (Coupon / Market Price) × 100
  • Capital Gains: Earned when bond is bought at discount and redeemed at par.
  • YTM (Yield to Maturity): Total expected return including coupons and gain/loss.

2. Inflation vs Interest Rates

As inflation rises, interest rates often rise to control it. This inversely impacts bond prices.

3. Bond Price vs Yield

Interest Rates (Yields)Bond Prices
IncreaseFall
DecreaseRise

4. Bond Price vs Coupon

Higher coupon = higher income = higher bond price in secondary markets. Zero-coupon bonds trade at discount.

5. Bond Price vs Duration

Duration measures sensitivity of bond price to interest rate changes. Longer duration = more sensitivity.

6. Price vs Coupon vs Yield vs Duration

FactorImpact on Price
High CouponIncreases Price
High YieldDecreases Price
High DurationMore Price Volatility

7. Yield Curve Types

TypeShapeEconomic Indication
NormalUpwardGrowth expected
FlatHorizontalUncertainty
InvertedDownwardRecession risk

8. Bond Duration

  • Macaulay Duration: Weighted average time to receive cash flows
  • Modified Duration: Price sensitivity = Macaulay Duration / (1 + Yield)

9. Bond Valuation

Price = Present value of all future cash flows.

Price = ∑ (Coupon / (1+r)^t) + (Face Value / (1+r)^n)

Conclusion

Understanding how bond price, coupon, yield, and duration interact helps you navigate interest rate movements and market conditions smartly. Always match your investment goals and risk appetite with the right bond strategy.

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