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Bond prices and interest rates are closely related and can both be used to forecast economic activity, so investors should at least be aware of the basics: how interest rates affect bond prices ...
Here’s how the tax-equivalent yield of a municipal bond works and how to figure it. ... let’s say you pay a 32 percent federal rate and an 8 percent state rate. The same 3 percent muni bond ...
Given: 0.5-year spot rate, Z1 = 4%, and 1-year spot rate, Z2 = 4.3% (we can get these rates from T-Bills which are zero-coupon); and the par rate on a 1.5-year semi-annual coupon bond, R3 = 4.5%. We then use these rates to calculate the 1.5 year spot rate. We solve the 1.5 year spot rate, Z3, by the formula below:
the length of time over which the bond produces cash flows for the investor (the maturity date of the bond), interest earned on reinvested coupon payments, or reinvestment risk (the uncertainty about the rate at which future cash flows can be reinvested), and; fluctuations in the market price of a bond prior to maturity. [3]
The daily portion of the discount uses a compounded interest formula with the principal recalculated every six months. The following table illustrates how to calculate the original issue discount for a $7,462 bond with a $10,000 repayment and a three-year maturity date: [2]
Put bond: This type of bond gives the investor the right to demand early repayment of the principal, effectively canceling the loan. Floating-rate bonds: Not all bonds are fixed-income bonds. Some ...
Duration is a linear measure of how the price of a bond changes in response to interest rate changes. As interest rates change, the price does not change linearly, but rather is a convex function of interest rates. Convexity is a measure of the curvature of how the price of a bond changes as the interest rate changes.
Long-term bonds and some corporate bonds may become more attractive if interest rates continue to fall in 2025. As market demand shifts from shorter-term bonds to longer-term debt instruments, the ...