Explain the relationship between time to Maturity and bond valuation with the help of a diagram
Answers
Step-by-step explanation:
When investing in bonds, it is sometimes tempting to go for longer-term bonds with higher yields. As an investor, you need to be aware of the risks involved with different bond choices. One of those risks is the higher volatility of long-term bonds. The rate vs. volatility trade-off can be a benefit or danger, depending on what happens with interest ratesBond Price Function
The price or market value of an investment bond is based on the rate of interest the bond pays -- called the coupon rate -- compared to the current market yield for similar bonds. If a bond's coupon rate is higher than market rates, the value of the bond will be higher than the face amount to bring the yield an investor earns in line with current rates. This is called a premium bond. A discount bond is priced below the face amount, because the bond's coupon rate is lower than current market rates. Bond prices move inversely to interest rate changes.
Factors Affecting Price Volatility
Two features of bonds affect the price volatility in response to changes in market interest rates. A bond with a lower coupon rate will be more volatile than a bond with a higher coupon rate. Also, longer-term bonds are more volatile than bonds with a shorter time to maturity. Volatility in this case is the amount a bond's price changes in response to a specific change in interest rates.
Answer:
explain the relationship between time to maturity and bond valuation with the help of a diagram