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Computerized Investing > First Quarter 2013

Bond Prices, Returns and Volatility

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by Wayne A. Thorp, CFA

In the Fourth Quarter 2012 installment of Spreadsheet Corner (available online at the Computerized Investing website), we started a discussion on using a spreadsheet to calculate the volatility of bond prices given changes in coupon rate and time to maturity.

The coupon rate is the interest rate on the bond that is established at the time it is issued. Recall that there is an inverse relationship between bond values and interest rates: If market interest rates go up, the value of the fixed interest and principal payments you expect to receive goes down. Conversely, if interest rates fall, the value of the bonds will increase. In other words, the bond market rallies when interest rates fall.

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