Investments, tenth edition

 Example  14.3 

Bond Pricing on a Financial Calculator 

   Figure 14.3  shows the price of the 30-year, 8% coupon bond for a range of interest rates, 

including 8%, at which the bond sells at par, and 10%, at which it sells for $810.71. The 

negative slope illustrates the inverse relationship between prices and yields. The shape 

of the curve in  Figure 14.3  implies that an increase in the interest rate results in a price 

bod61671_ch14_445-486.indd   454

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7/17/13   3:51 PM

7/17/13   3:51 PM

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  C H A P T E R  

1 4

  Bond Prices and Yields

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decline that is smaller than the price gain resulting from a decrease of equal magnitude 

in the interest rate. This property of bond prices is called  convexity  because of the convex 

shape of the bond price curve. This curvature reflects the fact that progressive increases in 

the interest rate result in progressively smaller reductions in the bond price.  

7

    Therefore,  the 

price curve becomes flatter at higher interest rates. We return to convexity in Chapter 16.    

0

5

8

10

15

20

Interest Rate (%)

Bond Price ($)

0

500

810.71

1,000

1,500

2,000

2,500

3,000

3,500

4,000