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$1,036.25

+ 7.94

Several things emerge from this table. First, interest rates apparently rose between December 31, 1995, and July 31, 1996 (why?). After that, however, they fell (why?). The longer-term bond's price first lost 20 percent and then gained 12.5 percent. These swings are greater than those on the two shorter-lived issues, which illustrates that

© The McGraw-Hill Companies, 2002

Ross et al.: Fundamentals I III. Valuation of Future I 7. Interest Rates and Bond I I © The McGraw-Hill of Corporate Finance, Sixth Cash Flows Valuation Companies, 2002

Edition, Alternate Edition

208 PART THREE Valuation of Future Cash Flows longer-term bonds have greater interest rate risk. For the two issues maturing in 2033, notice that the one with the lower coupon rate had larger gains and losses, which is what we would expect based on our second point regarding coupon rates and interest rate risk.

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