In this lesson, students learned how to apply the BuffettsBooks.com bond calculator. We learned that as interest rates increase, the value of a bond decreases. Similarly, when interest rates decrease, the value of a bond decreases.
When using the bond calculator, it becomes evident that the term of the security changes as it approaches the maturity. Since a premium or discount paid for a bond cannot be recuperated through coupon payments, short term bonds are less affected by changes in interest rates compared to long term bonds. This idea of changing interest rates can be taken advantage of by intelligent investors if they purchase high yielding long term bonds. In order to find a high yielding, long term bond, an investor can implement the ideas learned in lesson 3 of this unit.