Changing Required Returns

The shorter the time period until a bond's maturity, the less responsive is its market value to a given change in the required return. In other words, short maturities have less interest rate risk than do long maturities when all other features, namely, CR, par value and frequency of interest payment, are the same.

To illustrate, the results relating to the bonds values for various required returns of the computations summarized in Table.

Changing Required Returns

Changing Required Returns

Depicts the behavior of these bond values. Each of the three required returns (i.e. 12, 10, and 8) is assumed to remain constant over the 10 years to its maturity. In each case, the Value ultimately equals the par value of Rs 1,000 at its maturity. At the 12 per cent RR, its discount declines with the passage of time as its value increases '. from Rs 887 to Rs 1,000. When the 10 per cent RR equals the CR, its value remains uncharged at Rs 1,000. Finally, at the 8 per cent RR, its premium will decline as its value drops from Rs 1,134 to

Bond Values and Required Returns

Bond Values and Required Returns

Rs 1.000. Thus. the value of a bond approaches Rs 1.000 par/maturity value as the time to maturity declines.
The effect of changing RRs on bonds of differing maturities is also depicted in denoted by the dotted line.

Time to Maturity and Bonds

Time to Maturity and Bonds

The main conclusion is that the shorter the time to maturity, the smaller the Impact on bond value caused by a given change in the required return.

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