Interest rate risk
Interest rate risk is the risk that a bond's market price falls when prevailing interest rates rise, because its fixed coupon becomes less attractive relative to newly issued bonds paying more.
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An irredeemable bond pays a fixed €4.50 coupon per €100 of nominal value. At a market yield of 4.5%, its price is €4.50 ÷ 0.045 = €100, at par. If yields rise to 6%, the price falls to €4.50 ÷ 0.06 = €75 — a 25% drop, purely because market yields moved while the coupon stayed fixed.
Where it fits
SubjectCorporate FinanceCoreTopicBond & Equity ValuationCore
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PracticeCORE
An irredeemable bond pays a fixed annual coupon of €6.00 per €100 of nominal value. Market yields for comparable bonds rise to 8%. What does the bond's price become, rounded to the nearest euro?
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