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Progresso di Studio
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Taught in English
Questo esame si sostiene in inglese: le lezioni e le domande sono in inglese. L'interfaccia resta in italiano.
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Key formulas
Current yield
The bond's annual income as a % of its current trading price.
Bond price–rate relationship
Inverse relationship: fixed coupon is less attractive when new rates rise.
Part 1 of 1
The single most-tested bond fact: bond prices and market interest rates move in opposite directions.
A bond is a promise to pay fixed cash flows (coupons + face value at maturity). Once issued, those cash flows are fixed. When market rates rise, newly issued bonds offer higher coupons — the existing bond, locked into its lower coupon, becomes less attractive. Its price falls until the effective return matches the market rate.
When market rates fall, the existing bond's higher fixed coupon looks attractive — investors bid up its price above face value (it trades at a premium).
Three pricing scenarios: - At par: market rate = coupon rate → price = face value. - At a discount: market rate > coupon rate → price < face value. - At a premium: market rate < coupon rate → price > face value.
Longer maturity bonds are more sensitive to rate changes (higher "duration") — their cash flows stretch further into the future, so small rate shifts create larger price swings.
Worked example
A bond with face value €1,000 pays a 5% annual coupon (€50/year). Market rates rise to 7%. No rational investor will pay €1,000 for a 5% bond when new 7% bonds are available. The price falls — roughly to €1,000 × (5/7) ≈ €714 — until the effective yield on the old bond matches the new 7% market rate.
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