Ch03 - Bond

Chapter 3
BOND INVESTMENT
Lecture: D r. N G U Y Ễ N D U Y L I N H
FA C U LT Y O F F I N A N C E
BANKING UNIVERSITY OF HCMC
CONTENT
2
I. Types of bonds
II. Computing bond yields
III. Main risks of investing in a bond
IV. Interest rate sensitivity
V. Bond pricing
VI. Bond prices over time
TS. Nguyễn Duy Linh

I. TYPES OF BONDS
3
1. Treasury securities
2. Municipal bonds
3. Corporate bonds

1. TREASURY SECURITIES
4
 The U.S. Treasury issues bill, notes and bonds to

finance the national debt.
 These debt securities have different maturity
Type Maturity
Treasury bill Less than 1 year
Treasury note 1 to 10 years
Treasury bond 10 to 30 years

2. MUNICIPAL BONDS
5
 Municipal bonds are securities issued by local, county,

and state governments.
 The proceeds from these bonds are used to finance
public interest projects, such as schools, utilities, and
transportation systems.
 Interest earned on municipal bonds that are issued to pay
for essential public projects are exempt from federal
taxation  allows the municipality to borrow at a lower
cost

3. CORPORATE BONDS
6
 Corporate bonds are the means by which private firms

borrow money directly from the public
 Callable bonds
 Convertible bonds
 Puttable Bonds
 Floating-Rate Bonds

CORPORATE BONDS
7
 Callable bonds are issued with call provisions allowing the

issuer to repurchase the bond at a specified call price before
the maturity date.
 The option to call the bond is valuable to the firm, allowing
it to buy back the bonds and refinance at lower interest rates
when market rates fall.
 The firm’s benefit is the bondholder’s burden  callable
bonds are issued with higher coupons and promised yields
to maturity than noncallable bonds
 Callable bonds typically come with a period of call
protection, an initial time during which the bonds are not
callable  are referred to as deferred callable bonds.
CORPORATE BONDS
8
 Convertible bonds: give bondholders an option to exchange

each bond for a specified number of shares of common stock
of the firm. The conversion ratio is the number of shares for
which each bond may be exchanged.
 E.g., a convertible bond is issued at par value of $1,000 and
is convertible into 40 shares of a firm’s stock.
 The stock price is $20/share  the option to convert is not
profitable
 The stock price is $30/share  each bond may be converted
profitably into $1,200 worth of stock

CORPORATE BONDS
9
 The market conversion value is the current value of the

shares for which the bonds may be exchanged. At the $20
stock price, the bond’s conversion value is $800.
 The conversion premium is the excess of the bond’s value
over its conversion value. If the bond were selling currently
for $950, its premium would be $150.
 Convertible bondholders benefit from price appreciation of
the company’s stock. This benefit comes at a price:
 Convertible bonds offer lower coupon rates and stated or promised
yields to maturity than do nonconvertible bonds. However, the actual
return on the convertible bond may exceed the stated yield to maturity if
the option to convert becomes profitable.

CORPORATE BONDS
10
 Puttable Bonds is a bond with an embedded put option. The

holder of the puttable bond has the right, but not the
obligation, to demand early repayment of the principal.
 If the bond’s coupon rate exceeds current market yields, for
instance, the bondholder will choose to extend the bond’s
life.
 If the bond’s coupon rate is too low, it will be optimal not to
extend; in this case, the bondholder will instead reclaim
principal, which can be invested at current yields.

CORPORATE BONDS
11
 Floating-rate bonds make interest payments that are tied to

some measure of current market rates.
 For example, the rate might be adjusted annually to the
current T-bill rate plus 2%. If the 1-year T-bill rate at the
adjustment date is 4%, the bond’s coupon rate over the next
year would then be 6%. This arrangement means that the
bond always pays approximately current market rates.

II. COMPUTING BOND YIELDS
12
1. Nominal yield
2. Current yield
3. Promised yield to maturity (YTM)
4. Promised yield to call (YTC)
5. Realized compound return
 Nominal and current yields are mainly descriptive and

contribute little to investment decision making

1. NOMINAL YIELD
13
 Nominal yield is the coupon rate of a particular issue,

e.g. a bond with an 8 percent coupon has an 8 percent
nominal yield.
 This provides a convenient way of describing the
coupon characteristics of an issue.

2. CURRENT YIELD
14
 This yield measures the current income from the bond as a

percentage of its price
C
CY=
MP0
Where
 C is the fixed annual coupon
 MP0 is the bond’s current market price
 It is important to income-oriented investors (e.g., retirees)

who want current cash flow from their investment portfolios.
 Current yield has little use for investors who are interested in
total return because it excludes the important capital gain or
loss component.
3. PROMISED YIELD TO MATURITY
15
 The yield to maturity (YTM) is defined as the interest rate

that makes the present value of a bond’s payments equal to
its price.
 This interest rate is often interpreted as a measure of the
average rate of return that will be earned on a bond if:
 The investor holds the bond to maturity
 The investor reinvests all the interim cash flows at the

computed YTM rate

PROMISED YIELD TO MATURITY
16
 Computing the promised yield to maturity

−
+
= + ~
1+ 1+ +
2
 YTM for a zero-coupon bond

= −1
=
1+
= −1 ×2

17
 Example 1: You buy an 8 percent, 20-year bond with the

priced of $900. Calculate a semi-annual promised YTM and
an annual promised YTM.
 Example 2: A zero coupon bond maturing in 10 years with a
maturity value of $1,000 selling for $311.80. Calculate a
semi-annual promised YTM and an annual promised YTM.
 Example 3: Suppose an 8% coupon, 30-year bond is selling
at $1,276.76. What average rate of return would be earned
by an investor purchasing the bond at this price?

TS. Nguyễn Duy Linh 18
20
 Premium Bonds (market price > par value)

Coupon rate > Current yield > YTM
 Discount Bonds (market price < par value)
Coupon rate < Current yield < YTM
 “Par” Bonds (market price = par value)
Coupon rate = Current yield = YTM

4. PROMISED YIELD TO CALL
21
 Low interest rates: The price of the callable bond is flat

since the risk of repurchase or call is high
 High interest rates: The price of the callable bond

converges to that of a normal bond since the risk of call
is negligible

PROMISED YIELD TO CALL
22
 Although investors use promised YTM to value most bonds,

they must estimate the return on certain callable bonds with
a different measure—the promised yield to call (YTC).
 YTC measures the estimated rate of return for bond held to
first call date.
= +
1+ 1+
 Where
 Pm = the current market price of the bond
 Ci = the annual coupon payment for Bond i
 nc = the number of years to first call date
 Pc = the call price of the bond

PROMISED YIELD TO CALL
23
 Example: Suppose the 8% coupon, 30-year maturity bond

sells for $1,150 and is callable in 10 years at a call price of
$1,100. Its yield to maturity and yield to call would be
calculated using the following inputs:
Yield to Call Yield to Maturity

Coupon payment $40 $40
Number of semiannual periods 20 60
Final payment $1,100 $1,000
Price $1,150 $1,150

5. REALIZED COMPOUND RETURN
24
 YTM will equal the realized compound return (RCR) over

the life of the bond if all coupons are reinvested at an
interest rate equal to the bond’s YTM. If not, YTM is
different from RCR
 Ex: A 2-year bond selling at par value paying a 10% coupon

once a year. The yield to maturity is 10%. Calculate RCR if
a. Reinvestment rate = 10%
b. Reinvestment rate = 8%

III. MAIN RISKS (SOURCES OF RISK) OF
INVESTING IN A BOND
27
1. Interest rate risk

2. Reinvestment risk
3. Credit (default) risk
4. Inflation risk
5. Liquidity risk
6. Exchange rate risk

1. INTEREST RATE RISK
28
 Interest rate risk is the riskiness of an asset’s return that

results from interest-rate changes. In particular, bond prices
and yields are inversely related.
 As interest rates rise and fall, bondholders experience capital
losses and gains. These gains or losses make fixed-income
investments risky, even if the coupon and principal payments
are guaranteed.
 Interest rate risk increases for bonds with longer maturities
and lower coupon payments, and decreases for bonds with
shorter maturities and higher coupon payments.

2. REINVESTMENT RISK
29
 Reinvestment risk is the component of interest rate risk due

to the uncertainty of the rate at which coupon payments/the
proceeds from the short-term bond will be reinvested.
 Reinvestment risk is related to interest rate risk but has the
opposite effect on a bond's performance.
 Reinvestment risk increases for bonds with longer maturities
and higher coupon payments, and decreases for bonds with
shorter maturities and lower coupon rates.

3. CREDIT RISK
30
 Credit (default) risk occurs when the issuer of the bond is

unable or unwilling to make interest payments when
promised or to pay off the face value when the bond
matures.
 Bond default risk is measured by Moody’s Investor Services,
Standard & Poor’s Corporation, and Fitch Investors Service.
 Those rated BBB or above (S&P, Fitch) or Baa and above
(Moody’s) are considered investment-grade bonds, whereas
lower-rated bonds are classified as speculative-grade or
junk bonds.

4. INFLATION RISK
32
 Inflation risk occurs when the increase in inflation reduces

the purchasing power of a bond’s future coupons and
principal.
 Inflation may lead to higher interest rates which is negative
for bond prices.
 Inflation Linked Bonds are structured to protect investors
from the risk of inflation. The coupon stream and the
principal (or nominal) increase in line with the rate of
inflation and therefore, investors are protected from the
threat of inflation.

5. LIQUIDITY RISK
33
 This is the risk that investors may have difficulty finding a

buyer when they want to sell and may be forced to sell at a
significant discount to market value.
 The more liquid an asset is, the more desirable it is (higher
demand), holding everything else constant.
 Bonds that trade frequently and in large amounts, such as
Treasury securities, usually have less liquidity risk than
bonds which trade less frequently.
 Liquidity risk becomes a smaller factor in overall return as
an investors holding period lengthens

6. EXCHANGE RATE RISK/CURRENCY RISK
34
 An investor is exposed to currency risk if a bond is

denominated in a currency other than his home currency.
Exchange rate risk arises from uncertainty in exchange rate
fluctuations.
 We can assess the magnitude of exchange rate risk by
examining historical rates of change in various exchange
rates and their correlations.

IV. INTEREST RATE SENSITIVITY
35
1. Characteristics of interest rate sensitivity

2. Duration
3. Convexity

1. CHARACTERISTICS OF
INTEREST RATE SENSITIVITY
36
D Initial
Bond Coupon Maturity
YTM
A 12% 5 years 10%
Percentage Change in Bond Price
C
B 12% 30 years 10%
C 3% 30 years 10%
B
D 3% 30 years 6%
A
0
A
B
C
Change in Yield to Maturity (%) D
CHARACTERISTICS OF
37
 Bond prices and yields are inversely related
 An increase in a bond’s YTM results in a smaller price

change than a decrease in yield of equal magnitude.
Face value ($) 1000 1000 1000
Time to maturity 20 20 20
Coupon rate 8% 8% 8%
Coupon 80 80 80
YTM 10% 14% 6%
Price of bond
Annual payment ($) 829.73 602.61 1,229.40
Change in price -27% 48%
CHARACTERISTICS OF
38
 Long-term bonds tend to be more price sensitive to interest rate

changes than short-term bonds (bond A vs. bond B).
 As maturity increases, price sensitivity increases at a decreasing
rate
Face value ($) 1000 1000 1000 1000 1000 1000
Time to maturity 5 5 5 5 5 5
Coupon rate 8% 8% 8% 8% 8% 8%
Coupon 80 80 80 80 80 80
YTM 10% 12% 14% 16% 20% 22%
Price of bond 924.18 855.81 794.02 £738.06 641.13 599.09
Change in price -7% -14% -20% -31% -35%
Change in price -16% -26% -34% -46% -51% Δ= -9% 120%
Change in price -24% -35% -43% -55% -59% Δ= -8% 48%
Change in price -27% -38% -46% -57% -61% Δ= -3% 14%

CHARACTERISTICS OF
39
 Interest rate risk is inversely related to the bond’s

coupon rate (B vs. C)
 Price sensitivity is inversely related to the yield to

maturity at which the bond is selling (C vs. D)

2. DURATION
40
A. Definition
B. Duration and Interest Rate Risk
C. Duration Rules

DURATION
A. DEFINITION
41
 A bond’s duration is often considered the second most

important statistic used to evaluate a bond, after the
YTM A measure of the effective maturity of a bond
 The notion of bond duration was first developed by
Frederick R. Macaulay (1938).
 Macaulay’s duration equals the weighted average of
the times to each coupon or principal payment
 The weights are proportional to the present value of the
payment

DURATION
A. DEFINITION
42
 Macaulay’s duration formula:
/ 1+
= × =
 Where CFt = Cash flow at time t; P = Price of bond; y = YTM
 E.g: Let calculate duration of the two following bonds for a

yield to maturity of 10%:
 A coupon bond matures in 2 years, makes semiannual coupon
payments of 8% of the face value (1000$).
 A zero bond matures in 2 years, face value (1000$).
(semiannual compounding)
= ×
= × =1× +2× + ⋯+ ×

DURATION
DEFINITION
46
 Duration-Price Relationship
 Price change is proportional to duration
P   1  y  
 D   
P  1  y 
 D* = Modified duration = D/(1+y)
Δ ∗
=− ×Δ
 Note: Δ(1 + y) = Δy

DURATION
B. DURATION AND INTEREST RATE RISK
47
 Two bonds have duration of 1.8852 years

 Bond A: 2-year, 8% coupon bond with YTM = 10%
 Bond B: Zero coupon bond maturing
 Suppose the semiannual interest rate (y, YTM) increases

by 0.01%, from 5% to 5.01%. Let calculate changes in
prices of these two bond.

DURATION
DURATION AND INTEREST RATE RISK
50
Coupon Bond Zero

 The coupon bond price  The zero-coupon bond
drops from $964.540 to price drops from
$964.1942, when its yield $831.9704
increases to 5.01% ($1,000/1.053.7704) to
$831.6717
($1,000/1.05013.7704)
 Percentage decline of  Percentage decline of

0.0359% 0.0359%

DURATION
DURATION RULES
51
 Rule 1
 The duration of a zero-coupon bond equals its time to
maturity
 Rule 2
 Holding maturity constant, a bond’s duration is higher when
the coupon rate is lower
 Rule 3
 Holding the coupon rate constant, a bond’s duration
generally increases with its time to maturity

DURATION
DURATION RULES
52
 Rule 4
 Holding other factors constant, the duration of a coupon
bond is higher when the bond’s yield to maturity is lower
 Rule 5
 The duration of a level perpetuity is equal to:
1 y
y

DURATION
EXAMPLE
53
Bond duration versus bond maturity
35.0
30.0 Zero-Coupon Bond
25.0
20.0
Duration (Years)
15.0
15% Coupon 6% YTM
10.0
3% Coupon 15% YTM
5.0 15% Coupon 15% YTM
0.0
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Maturity Settlement date 01/01/2000

DURATION
EXAMPLE
54
Bond Durations (YTM = 8% APR; Semiannual Coupons)
Coupon Rates (per Year)

Maturity (years) 2% 4% 6% 8% 10%
1 0.995 0.990 0.985 0.981 0.976
5 4.742 4.533 4.361 4.218 4.095
10 8.762 7.986 7.454 7.067 6.772
20 14.026 11.966 10.922 10.292 9.870
Infinite (perpetuity) 13.000 13.000 13.000 13.000 13.000

3. CONVEXITY
55
A. Introduction
B. Why do investors like convexity?

CONVEXITY
INTRODUCTION
56
 The relationship between bond prices and yields is

not linear
 Duration rule is a good approximation for only small
changes in bond yields
 Bonds with greater convexity have more curvature
in the price-yield relationship

CONVEXITY
INTRODUCTION
57
 30-Year Maturity, 8% Coupon; Initial YTM = 8%
Actual Price Change

Duration Approximation
0
0
Change in Yield to Maturity (%)

CONVEXITY
INTRODUCTION
58
1
= ( + )
× (1 + ) (1 + )
 Correction for Convexity:
Δ ∗
1
=− × Δ + [Convexity × (Δ ) ]
2

CONVEXITY
INTRODUCTION
59
 Example: Compute the convexity of 3-year bond, 12%

annual coupon, 9% YTM.

CONVEXITY
INTRODUCTION
61
 Example: 30-Year Bond, 8% Coupon, 8% YTM, Price

= par value = $1,000; Modified Duration: 11.26 years;
Convexity: 212.4.
 A. Calculate the price of bond when:
 A1. YTM = 10%
 A2. YTM = 8.1%
 B. Calculate changes in bond price by using duration,
convexity when:
 B1. Bond’s yield increases from 8% to 10%
 B2. Bond’s yield increases from 8% to 8.1%

CONVEXITY
INTRODUCTION
62
 Bond’s yield increases from 8% to 10%  ΔP/P = ________.

 The duration rule would predict a price decline of:
 which is considerably ___________ the bond price actually falls.

The duration-with-convexity rule is far more accurate:

CONVEXITY
INTRODUCTION
64
 Bond’s yield increases from 8% to 8.1%  ΔP/P = _________

 The duration rule would predict a price decline of:
 Accounting for convexity, we get almost the precisely correct

answer:

CONVEXITY
WHY DO INVESTORS LIKE CONVEXITY?
66
 Convexity of Two Bonds

0
0
Bond A
Change in Yield to Maturity (%) Bond B

CONVEXITY
WHY DO INVESTORS LIKE CONVEXITY?
67
 Higher Convexity  Bigger price increases when

yields fall than loses when yields rise
 The more volatile interest rates, the more attractive

this asymmetry
 Bonds with greater convexity  higher prices

and/or lower yields, all else equal

V. BOND PRICING
68
1. Valuing a coupon bond

2. Valuing a zero-coupon bond (discount bond)
3. Valuing a perpetual bond

BOND PRICING
69
 General rule: The value of a financial asset is the present

value of the cash flows the asset is expected to provide.
0 1 2 3 …. n
C C C C C+F
BOND PRICING
70
 The process of valuation includes the following

steps:
 Calculate the expected cash flow created by the asset (CF)
 Estimate the discount rate (r)
 Calculate the present value (P0)
CF 1 CF 2 CF n
P0  1
 2
 ...  n
(1  r ) (1  r ) (1  r )
1. VALUING A COUPON BOND
71
 The value of a coupon bond is the present value of the interest

payments plus the present value of the principal payment:
 The interest payments are paid annually
1
= + = 1− +
(1 + ) (1 + ) (1 + ) (1 + )
 The interest payments are paid semi-annually

2n
C 2 F /2 1
P0   t
 2n = 1− +
t 1 1  i 2 1  i 2 /2 (1 + /2) (1 + /2)
• C: the annual coupon payment • i: the prevailing yield to maturity

• n: the number of years to maturity for this bond issue
• F: the par (face) value of the bond
VALUING A COUPON BOND
72
 Example: Assuming a yield to maturity for this bond of 10%,

calculate the value of an 8% coupon bond that matures in 20
years with a par value of $1,000 in the following cases:
 Semi-annual compounding
 Annual compounding

THE PRICE-YIELD CURVE
74
The Price-Yield Curve for a 20-Year, 8% Coupon Bond

Price
2,500
1,985
2,000
1,547
1,500
1,231
1,000
1,000 828
699
600
523
500
- YTM
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

THE PRICE-YIELD CURVE
75
 The price for a fixed-coupon bond moves in the

opposite direction to changes in yield to maturity:
 1. When the yield is below the coupon rate, the bond will be
priced at a premium to its par value.
 2. When the yield is above the coupon rate, the bond will be
priced at a discount to its par value.
 3. The price-yield relationship is not a straight line; rather, it is
convex.
 As yields decline, the price increases at an increasing rate; and, as
yields increase, the price declines at a declining rate
 This concept of a convex price–yield trade-off is referred to as
convexity

BOND PRICING BETWEEN COUPON DATES
76
 Accrued interest is the compensation to the seller of the bond for

interest income since the last coupon date (t days)
 The flat price or the clean price is the price of a coupon bond not
including accrued interest payments. The clean price is typically
the quoted price on financial news sites.
 The invoice price or the dirty price is the price of a coupon bond
including accrued interest payments.
Invoice price = Flat price + Accrued interest

77
T days
t days CF CF CF + F
………
0 1 2 n
P0 P1
Transaction
day (P)
 P0 : The price of a bond on the last coupon date
 P1 : The price of a bond on the next coupon date
 t : Days since last coupon
 T : Days in coupon period

78
 Two way to calculate the flat price of a bond on transaction day
Step Based on P0 Based on P1
1 Calculate P0 Calculate P1
2 Calculate P (the invoice price) Calculate P (the invoice price)
which is the future value of P0: which is the present value of P0:
P = P0 × (1 + YTM)t/T P = (P1 + CF) / (1 + YTM)(1 – t/T)
3 Calculate the accrued interest Calculate the accrued interest
AI = CF × t/T AI = CF × t/T
4 Calculate the flat price: Calculate the flat price:
FP = P – AI FP = P – AI

79
2.5% coupon bond, 2% coupon bond,

maturing May 15, 2046 maturing August 2025
Issued date 15/05/2016 15/02/2016
Settlement date 15/05/2016 15/05/2016
Maturity date 15/05/2046 15/08/2025
Annual coupon rate 2.500% 0.02
Yield to maturity 2.595% 0.0173
Redemption value (% of face value) 100 100
Coupon payments per year 2 2
Days since last coupon 0 90
Days in coupon period 184 182
Accrued interest
P0
Invoice price
Flat price (% of par)
P1
Invoice price
Flat price (% of par)
2. VALUING A ZERO-COUPON BOND
81
 The value of a zero-coupon bond is present value of the

principal payment:
 The interest payments are paid annually
=
(1 + )
 The interest payments are paid semi-annually

=
(1 + /2)
• n: the number of years to maturity • i: the prevailing yield to maturity

• F: the par (face) value of the bond for this bond issue

3. VALUING A PERPETUAL BOND
82
 Perpetual bonds are fixed income securities which are not

redeemable, i.e., they do not have a maturity date.
 The value of a perpetual bond is the coupon amount which
divided by the discount rate.
=

VI. BOND PRICES OVER TIME
83
Bond 1 Bond 2
Annual coupon rate 12.0% Annual coupon rate 4.0%
Face value ($) 1,000 Face value ($) 1,000
Coupon payments per year 1 Coupon payments per year 1
Yield to maturity 8.0% Yield to maturity 8.0%
Year 0 1 2 3 4 5
Bond 1
CF1 0 120 120 120 120 1,120
Value 1,159.7 1,132.5 1,103.1 1,071.3 1,037.0 1,000.0
Bond 2
CF2 0 40 40 40 40 1,040
Value 840.3 867.5 896.9 928.7 963.0 1,000.0

BOND PRICES OVER TIME
84
When coupon rate > YTM:

• Maturity ↑  Price ↓
When coupon rate < YTM:

• Maturity ↑  Price ↑
When coupon rate = YTM:

• Maturity and Price are not
correlated
Price path of two 30-year maturity bonds, each
selling at a yield to maturity of 8%. Bond price
approaches par value as maturity date approaches.

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Chapter 3

TS. Nguyễn Duy Linh

TS. Nguyễn Duy Linh

 The U.S. Treasury issues bill, notes and bonds to

TS. Nguyễn Duy Linh

 Municipal bonds are securities issued by local, county,

TS. Nguyễn Duy Linh

 Corporate bonds are the means by which private firms

TS. Nguyễn Duy Linh

 Callable bonds are issued with call provisions allowing the

 Convertible bonds: give bondholders an option to exchange

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 The market conversion value is the current value of the

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 Puttable Bonds is a bond with an embedded put option. The

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 Floating-rate bonds make interest payments that are tied to

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 Nominal and current yields are mainly descriptive and

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 Nominal yield is the coupon rate of a particular issue,

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 This yield measures the current income from the bond as a

 It is important to income-oriented investors (e.g., retirees)

 The yield to maturity (YTM) is defined as the interest rate

 The investor reinvests all the interim cash flows at the

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 Computing the promised yield to maturity

 YTM for a zero-coupon bond

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 Example 1: You buy an 8 percent, 20-year bond with the

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 Premium Bonds (market price > par value)

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 Low interest rates: The price of the callable bond is flat

 High interest rates: The price of the callable bond

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 Although investors use promised YTM to value most bonds,

 Ci = the annual coupon payment for Bond i

 nc = the number of years to first call date

 Pc = the call price of the bond

 Example: Suppose the 8% coupon, 30-year maturity bond

Yield to Call Yield to Maturity

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 YTM will equal the realized compound return (RCR) over

 Ex: A 2-year bond selling at par value paying a 10% coupon

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1. Interest rate risk

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 Interest rate risk is the riskiness of an asset’s return that

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 Reinvestment risk is the component of interest rate risk due

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 Credit (default) risk occurs when the issuer of the bond is

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 Inflation risk occurs when the increase in inflation reduces

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 This is the risk that investors may have difficulty finding a

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 An investor is exposed to currency risk if a bond is

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1. Characteristics of interest rate sensitivity