Price and Interest Rate Relationship
Chapters in this video
- 0:00 The golden rule: inverse price and rate see-saw
- 1:05 Ivy the Investor: why her 4% bond price must drop
- 2:32 The maturity effect and Sam's 30-year contract trap
- 4:00 The coupon effect and how cash flow cushions price swings
- 5:10 Zero-coupon bonds and STRIPS maximum sensitivity
- 6:10 The T-Bill exception: short maturity overrides zero coupon
- 7:01 Rapid-fire exam recap
What this video covers
- Why bond prices and interest rates move in opposite directions, and why this is a mathematical certainty rather than a market tendency
- How a bond's coupon rate never changes after issuance, and why only the secondary market price adjusts to match new market rates
- Why longer maturity means more price sensitivity, and the opportunity cost logic that locks longer bonds to wilder see-saw swings
- Why lower coupon means more price sensitivity, and how higher periodic cash flow acts as a shock absorber against rate changes
- Why zero-coupon bonds have maximum interest rate risk at any given maturity, with Separate Trading of Registered Interest and Principal of Securities (STRIPS) as the exam's extreme example
- Why Treasury bills (T-Bills) are the short-term exception to the zero-coupon rule, and how their sub-one-year maturity overrides what would otherwise be high rate risk
- How maturity and coupon structure work together to determine total interest rate risk, and how to compare two bonds head-to-head on exam day
Read the full lesson, free
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