- Deep Discount Bonds.
18.1 Deep discount bonds having a face value will be issued at a deep discounted price
with a longer maturity period from the date of allotment. The investor as well as
the bond floating authority has the option to withdraw or redeem the bond
respectively at the end of the prescribed period.
18.2 The two important features of a Deep Discount Bond are that (i) there is no
reinvestment risk and (ii) the notional intermediate returns are not taxed.
- Determinants for interest Rates
19.1 The price of a bond and the required rate of return vary inversely.
19.2 Short-term risk – free interest rate
19.3 Short term risk free interest rate is the yield on a one-year Government security.
19.4 The expected real rate of return is the rate at which society is willing to trade
current consumption for future consumption.
19.5 Expected Rate of Inflation is the.-
Money supply in Velocity of money
The economy in circulation
Price level = ----------------------------------------------------
Real out put in the economy
Hence, the expected rate of inflation is nothing but the expected change in price
level that is :Change in the Money Change in the
Supply in the economy Velocity of money in
Circulation
Expected rate of inflation = ---------------------------------------------------------------
Change in the real out put of the economy
- Maturity Premium
20.1 Maturity premium represents the difference between the yield to maturity on a
short-term (one year) risk free security and the yield to maturity on a risk free
security of a longer maturity.