Question

a) Comparing two bonds with equal durations of 5 years, the percentage drop in the price...

a) Comparing two bonds with equal durations of 5 years, the percentage drop in the price of the bond with the higher convexity will be higher than the percentage drop in the price of the bond with the lower convexity, when interest rates increase

True/False

b) The higher the dividends paid on a share of stock over the next 3 months, the lower is the price of a forward contract on the share of stock with a delivery date in 3 months.

True/False

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a) The statement is false. Higher convexity signifies that the bond is less responsive to interest rate changes and hence less risky. Therefore, the percentage drop in the price of the bond with the lower convexity will be higher than the percentage drop in the price of the bond with the higher convexity, when interest rates increase.

b) The statement is true. Declaration of dividend shows a liquidation of profits from the company to its stockholders. The stockholders are able to earn better yield in the form of dividends than by reinvesting in the company. This leads to a reduction in price.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
For two bonds with equal coupons, duration would be higher for the bond with the shortest...
For two bonds with equal coupons, duration would be higher for the bond with the shortest maturity. A. True B. False For bonds of the same maturity and yield to maturity, the lower the coupon rate, the greater the duration. A. True B. False Convexity is a measure of how much a bond's price-yield curve deviates from the linear approximation of that curve. A. True B. False
QUESTION 5 Bond X and Bond Y are both zero coupon bonds that pay annually and...
QUESTION 5 Bond X and Bond Y are both zero coupon bonds that pay annually and have a 7% yield. Bond X matures in 5 years and Bond Y matures in 13 years. Calculate the percentage change in the price of each bond if interest rates suddenly decreased by 1.5%. Bond X: 6.82%, Bond Y: 16.77% Bond X: -6.82%, Bond Y: -16.77% Bond X: -7.31%, Bond Y: -20.15% Bond X: 7.31%, Bond Y: 20.15% None of the above. QUESTION 6...
A 9-month forward contract is issued on 1 March 2011 on a stock with a price...
A 9-month forward contract is issued on 1 March 2011 on a stock with a price of £9.56 per share at that date. Dividends of 20 pence per share are expected on both 1 April 2011 and 1 October 2011. (a) Calculate the forward price, assuming a risk-free rate of interest of 3% per annum effective and no arbitrage. (b) Explain why the expected price of the share in 9 months’ time is not needed to calculate the forward price.
Q 5 You decide to start a new taxi service in your spare time. The first...
Q 5 You decide to start a new taxi service in your spare time. The first thing you need to do is buy a car. After visiting Mr. Charming Salesman at Sundance Used Cars, you have narrowed your choice to 3 possibilities. The three cars you can afford and their yearly net revenues (fares - gas & maintenance) are listed below. Remember each car must be replaced when it finally dies if you are to remain in business. Assuming an...
If a piece of equipment is dropped and damaged during installation, the cost of repairing the...
If a piece of equipment is dropped and damaged during installation, the cost of repairing the damage should be added to the cost of the equipment. True False One advantage of issuing bonds instead of stock is that: a Interest is tax deductible, whereas dividends are not. b Bonds have a longer maturity date. c Interest rates are lower than dividend rates. d The issuance of bonds does not affect earnings per share. The amount of FICA tax and Medicare...
True or False (1) Everything else equal, bond price will be higher if investors are demanding...
True or False (1) Everything else equal, bond price will be higher if investors are demanding a higher return rate. (2) In general, investors believe bonds are riskier than stocks. (3) Typically, preferred stocks have voting rights, just like common stocks.
Two bonds A and B have the same credit rating, the same par value and the...
Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond A has 30 years to maturity and bond B has 5 years to maturity. - Discuss which bond will trade at a higher price in the market - Discuss what happens to the market price of each bond if the interest rates in the economy go up. - Which bond would have a higher percentage price change if interest rates...
Question 3: You are comparing the direct costs of investing in two different mutual funds. The...
Question 3: You are comparing the direct costs of investing in two different mutual funds. The share price (NAV) of fund A is $25.00 per share, the share price of fund B is $30.00. In this case, A)  Fund A has lower direct costs of investing B) Fund B has lower direct costs of investing. C) Fund A and B have the same direct costs. D) Fund A and B have very different costs. E) Answer cannot be determined based on...
Which two of the following five statements are correct? Select two alternatives: 1. Convertible debt usually...
Which two of the following five statements are correct? Select two alternatives: 1. Convertible debt usually carries a higher interest rate than other comparable noncovertible debt. 2. Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds. 3. Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt. 4. A call feature allows the issuer of...
Section 2 Calculations. 5pt each, 50 pts total. Show your work! Suppose, the spot exchange rate...
Section 2 Calculations. 5pt each, 50 pts total. Show your work! Suppose, the spot exchange rate is Euro €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 1% in the euro zone. Under the PPP, what is the one-year forward rate, €1 = $_________, that should prevail, round to 4 decimal places? Yesterday, you entered into a futures contract to buy Euro 62,500 at $1.5500 per Euro. Your...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT