e.g if price is low, yield on bond is higher than i, demand is high, rises, yield falls. i = .1 (10%) then Bond price = $1000 i = .05 (5%) then Bond price > $1000 ($1131.83) i = .15 (15%) then Bond price < $1000 ($894.12) - Note the inverse relationship between return on the asset (i) and price. - to give a high return the price of the asset must be low. - to give a low return the price of the asset must be high. (Aside: mortgages and loans often have similar payment streams to a bond) - Perpetuity or Consol: - a bond that promises a fixed payment forever (no maturity). e.g. $100 forever (N=infinity): PV of returns = $100 + $100 + $100 + + $100 . … (1+i) (1+i)2 (1+i)3 (1+i)N = $100 { 1 + 1 + 1 + + 1 } … (1+i) (1+i)2 (1+i)3 (1+i)N = $100 i
e.g if price is low, yield on bond is higher than i, demand is high, rises, yield falls. i = .1 (10%) then Bond price = $1000 i = .05 (5%) then Bond price > $1000 ($1131.83) i = .15 (15%) then Bond price < $1000 ($894.12) - Note the inverse relationship between return on the asset (i) and price. - to give a high return the price of the asset must be low. - to give a low return the price of the asset must be high. (Aside: mortgages and loans often have similar payment streams to a bond) - Perpetuity or Consol: - a bond that promises a fixed payment forever (no maturity). e.g. $100 forever (N=infinity): PV of returns = $100 + $100 + $100 + … + $100 . (1+i) (1+i)2 (1+i)3 (1+i)N = $100 { 1 + 1 + 1 + … + 1 } (1+i) (1+i)2 (1+i)3 (1+i)N = $100 i
micro18g.docx