Relationship of Bond Prices to Changes in Maturity and Coupon
Chapters in this video
- 0:00 Par value as the gravitational center of every bond
- 0:58 The automatic pull to par for discount and premium bonds
- 2:58 How maturity length amplifies price swings when rates change
- 4:22 Ladder versus bullet: two portfolio shelter strategies
- 6:08 Coupon rate as shock absorber and zero-coupon drama
- 7:15 The five-level volatility spectrum and ranking formula
- 8:05 Rapid-fire exam recap
What this video covers
- Why the pull to par is automatic and inevitable for every bond, regardless of what prevailing interest rates are doing
- How portfolio managers extend maturities when expecting rate declines and shorten maturities when expecting rate increases
- Why a laddered portfolio requires no directional rate forecast, and how it differs from a bullet strategy concentrated at a single maturity date
- When a bullet strategy precisely matches a known future cash need by aligning bond maturity with the liability date
- Why zero-coupon bonds have the highest duration and therefore the greatest price sensitivity for any given maturity
- How the coupon rate acts as a shock absorber, with high-coupon bonds cushioned against rate changes and low-coupon bonds fully exposed
- The definitive volatility ranking from most sensitive to least sensitive when combining maturity and coupon variables
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