I believe there is some risk involved. When the yield rate for a bond increases, the price of the bond decreases, so it "loses" some value from the perspective of the lender, while the investor would benefit. This is due to the inverse relationship between interest rates and bond prices. If interest rates increase, bond prices decrease, if interest rates decrease, bond prices increase (you could test this out by playing around with the bond price formula, try using different yield rates and see what happens to the price). So therefore, as I understand it, the risk for the investor is if the yield rates drastically decrease. I am not an expert in the effects of yield rates on bonds, so this is as far as I can explain. My expertise is in the math for FM, specifically as it relates to the actuarial exam FM and solving FM problems. If you want to read more about interest rates and bonds, I would recommend this article as it explains it better than I could in this comment: www.investopedia.com/ask/answers/why-interest-rates-have-inverse-relationship-bond-prices/
Good question! That is a very tricky scenario. If you need to solve for the yield rate, that is very difficult to do algebraically by hand. In that scenario I recommend using a financial calculator, such as the BA II Plus, which makes finding that unknown rate very easy and quick to do. I have a video all about how to use that calculator in my FM playlist that you can check out. The bottom line is that you want to put all the information you know into the calculator using the time value money buttons, and then hit the compute button followed by the interest rate button I/Y. If you have further questions about this let me know, but be sure to check out the calculator video first!
Which example are you referring to? I just went through all 3 examples and double checked my calculations and they all seem to be correct. If you can tell me which example and what part of the calculation you think is wrong, I can take an even closer look and explain anything you may have questions about. Let me know!
In part 2 of the last example, the correct price should be $474.772 instead of $1770.22. Although it's not a major issue since you provided detailed explanations for each step, I want to express my gratitude for your effort. It's unfortunate that some people don't appreciate it.@@JKMath
@@amalhelu1776 Thank you for the kind words, I appreciate that! I am interested however in how you arrived at $474.77 as the price of the bond. I checked my work again and $1770.22 seems to be the correct answer. I believe it makes sense from a logical standpoint as well: The par value of the bond is $2000, and the yield rate is larger than the coupon rate, so the bond should be bought at a discount, or less than par value, which will be a number lower than 2000, but still relatively close. So, the price being 1770.22 seems a lot more sensible than 474.77, as 474.77 is an extreme discount for the bond considering the par value, yield rate, and coupon rate. Would you mind sharing your calculations as best as you can? I would like to clear this up and potentially identify a mistake that either you or I are making. Please let me know!
![Summer Walker - Heart Of A Woman [Official Lyric Video]](http://i.ytimg.com/vi/SFddctbZzw8/mqdefault.jpg)
Thank you
You’re welcome!
If yield rates unexpectedly increase, before redemption, can the investor be at risk of losing money?
I believe there is some risk involved. When the yield rate for a bond increases, the price of the bond decreases, so it "loses" some value from the perspective of the lender, while the investor would benefit. This is due to the inverse relationship between interest rates and bond prices. If interest rates increase, bond prices decrease, if interest rates decrease, bond prices increase (you could test this out by playing around with the bond price formula, try using different yield rates and see what happens to the price). So therefore, as I understand it, the risk for the investor is if the yield rates drastically decrease. I am not an expert in the effects of yield rates on bonds, so this is as far as I can explain. My expertise is in the math for FM, specifically as it relates to the actuarial exam FM and solving FM problems. If you want to read more about interest rates and bonds, I would recommend this article as it explains it better than I could in this comment: www.investopedia.com/ask/answers/why-interest-rates-have-inverse-relationship-bond-prices/
if all the information is given but only j we need to find, so how to solve it?
Good question! That is a very tricky scenario. If you need to solve for the yield rate, that is very difficult to do algebraically by hand. In that scenario I recommend using a financial calculator, such as the BA II Plus, which makes finding that unknown rate very easy and quick to do. I have a video all about how to use that calculator in my FM playlist that you can check out. The bottom line is that you want to put all the information you know into the calculator using the time value money buttons, and then hit the compute button followed by the interest rate button I/Y. If you have further questions about this let me know, but be sure to check out the calculator video first!
thank you@@JKMath
Your answer is incorrect although you put yhe right formula but calculation is incorrect
Which example are you referring to? I just went through all 3 examples and double checked my calculations and they all seem to be correct. If you can tell me which example and what part of the calculation you think is wrong, I can take an even closer look and explain anything you may have questions about. Let me know!
In part 2 of the last example, the correct price should be $474.772 instead of $1770.22. Although it's not a major issue since you provided detailed explanations for each step, I want to express my gratitude for your effort. It's unfortunate that some people don't appreciate it.@@JKMath
@@amalhelu1776 Thank you for the kind words, I appreciate that! I am interested however in how you arrived at $474.77 as the price of the bond. I checked my work again and $1770.22 seems to be the correct answer. I believe it makes sense from a logical standpoint as well: The par value of the bond is $2000, and the yield rate is larger than the coupon rate, so the bond should be bought at a discount, or less than par value, which will be a number lower than 2000, but still relatively close. So, the price being 1770.22 seems a lot more sensible than 474.77, as 474.77 is an extreme discount for the bond considering the par value, yield rate, and coupon rate. Would you mind sharing your calculations as best as you can? I would like to clear this up and potentially identify a mistake that either you or I are making. Please let me know!
You are right the bond price should be close to the face value. I made a mistake in my calculation and you are absolutely right👍@@JKMath
Ok that makes more sense. Thanks for responding back! Glad we could clear this up!