Value of Option-free bond is not affected by Yield volatility???

As interest rates (yields) go up or down, the price of the bond will change… why is the statement above correct or incorrect???

For simplicity’s sake: take a bond paying 7% annually issued at par - $1,000 (when market rates for similar issues are at 7%).

Now, one year later, the market rate for similar bonds is 6%. The original bond in the example is paying $70 every year but new bonds are only paying $60, so logic tells us that an investor would pay more (a premium) for the original bond because its paying a higher coupon.

Thus, the decrease in interest rates has caused the price of the bond to increase (inverse relationship).

The exact opposite is true for an increase in rates.

Did i just get suckered in by a troll?

Is the statement correct or not???

Well, yes…yes, it’s correct.

And a follow up question for you: how’d you perform on L1 Fixed Income?

They’re not saying that the price isn’t affected by changes in yield; of course they are.

They’re saying that today’s price is a function of today’s yield, but not yesterday’s, last week’s, or last month’s. If the yield today is 4.312%, then to compute the price today you discount at 4.312%, whether the interest rate volatility is 0.5% or 1.0% or 3.5%.

The point they’re trying to make is that interest rate volatility affects the value of embedded options – just as volatility of the underlying affects the value of all other types of options (see Black-Scholes-Merton) – but it doesn’t affect the value of the option-free bond.

I guess one can say that the value of an option-free bond is affected by the level of interest rate but not by the volatility of interest rates.


Yup! Vol is not used in pricing an option free bond.

Thanks to all!

You’re welcome.