3 ms·
> You would get $100/1.05^10 = $61.39. Emphasis on the exponential decay relationship between market price and time-to-maturity. If you change that 10 to a 30,
by actionablefiber 4y ago
> You would get $100/1.05^10 = $61.39.
Emphasis on the exponential decay relationship between market price and time-to-maturity. If you change that 10 to a 30, the bond is worth $23, and if you change it to a 50, it's $8.72. For a bond that pays $100 at maturation.
I think laypeople intuitively guess that long-dated bonds are safer, because that is sort of how it feels when you are borrowing money to buy a house. But in terms of the market value of the bond, you add exponentially more interest rate sensitivity as the time-to-maturity increases.
- panarky 4y agoThe rule of thumb is that for each 1% increase in interest rates, a bond loses its years to maturity as a percentage. So a bond with five years to maturity would lose 5%, and a bond with ten years to maturity would lose 10%. If SVBs bonds had a ten year maturity when purchased, that's probably nine years remaining when interest rates increased from 1.5% to 5.0%, so that's 9 * 3.5 = 31.5% reduction in value. If they bought $80 billion of these, that's a $25 billion dollar loss. If their shareholders equity was $16 billion, then that's zeroed and a combination of depositors, the FDIC (for insured deposits) and other creditors would have to eat the remaining $9 billion.