Calculating a bond's fair value..do we need to know how to do this? interest, market, change, numbers

spartan1

Hello,

I was just wondering if we will need to know how to calculate a bond's fair value based on changing interest rates. I know that if interest rates go up, fair value goes down and vice versa, but will we need to know how to crunch numbers?

ie. calculate bond fair value when market rates 7% .. then if it shifts to 9% calculate change in fair value.

thanks!

Kiakaha

You would also be required to do this if you have to calculate:

1. The change in a bond's price due to a change in interest rates
2. The change in a bond's price due to the passage of time.
3. The amount of reinvestment income required to obtain a specified yeild.

Gotta know it for sure!!

Jolyn

oh wow haha sorry guys! i've only gone through ethics, quant, econ, and FRA.. haven't hit fixed income yet. i was looking over the long-term liabilities section and was just wondering b/c i don't think calculating a bond's fair value is in FRA. whereas calculating its book value is.

thanks!

marsilni

of course...

did you get to duration yet?

whether or not you have to actually calculate a value for a test question is unknown (and may be too easy to ask) but you will have to apply it for sure.