Question

- Give an example of the effect of interest rate changes on a fixed coupon bond, what factors cause the relationship discussed in answer 1 (relationship between interest rates and bond prices).
- How can the same bond sell at par, at a discount, and at a premium over its life?

Answer #1

1)there exists a close relationship between the interest rates and bond prices. if the interest rates fall in general the bonds will become attractive and hence the demand for the bonds will go up causing and increase in price. if the interest rates goes up , then the fixed interest bearing bonds will become less attractive and hence the price will fall. thus there is an inverse relationship between bond price and interest rates.

2)

assume that an investor bought a $10,000 5% bond that matures in 5 years. Over the next couple of years, the market interest rates fall so that new $10,000, 10-year bonds only pay a 2% coupon rate. The investor holding 5% bond has a better position compared to the one with 2% . therefore the investor holding the 5% bond will sell the bond only at a premium amount in the secondary market. i.e when in interest falls , higher yielding bonds become more attractive and hence are sold at a premium.

conversly, as interest rates rise, new bonds will be issued at higher rates pushing those bond yields up in comparison to the bond which were previously issued. hence the older bond with lower yields will become less attractive in the secondary market and hence will be sold at a discount.

a bond will be sold at par when the yield to the investor is equal to the coupon amount.

hence , the same bond may sold at premium ,par or discount ,depending on the relative position of its coupon rate against the market interest rate .

a
20 year, 8% coupon rate, $1,000 par bond that pays interest
semi-annually bought five years ago for $850. this bond is
currently sold for 950. what is the yield on this bond?
a.12.23%
b.11.75%
c.12.13%
d.11.23%
an increase in interest rates will lead to an increase in the
value of outstanding bonds.
a. true
b. false
a bond will sell ____ when coupon rate is less than yield to
maturity, ______ when coupon rate exceeds yield to maturity, and...

.
A bond pays a coupon of $120. If the market interest rate is 10%,
then the bond will sell at a ___________. If the market interest
rate is 15%, then the bond will sell at a __________.
discount; discount
premium; premium
discount; premium
premium; discount

There is an inverse relationship between bond prices and yields.
This inverse relationship will be demonstrated by calculating bond
prices to show that interest rates move inversely: if yields rise,
then bond prices fall. Bonds will be sold either at a premium or a
discount. With this in mind respond to the following question.
You currently own a 30 year Treasury Bond paying a 4% annual
coupon rate. The market interest rates for like securities rose to
5%. Would your...

Which of the following best describes interest rate risk?
The risk that a bond issuer will default on the promised coupon
payments of a bond.
The risk that the periodic coupon payments received from a bond
cannot be reinvested at the same rate of return.
The inverse relationship between changes in interest rates and
the price of a fixed income security.
The risk that the purchasing power of periodic coupon payments
received will diminish over a long period of time.

a) First, consider a 10 year bond with a coupon rate of 7% and
annual coupon payments. Draw a graph showing the relationship
between the price and the interest on this bond. The price should
be on the y- axis and the interest rate on the x-axis. To compute
the various prices, consider interest rates between 2% and 12% (use
0.5% increments). So your x-axis should go from 2%, then 2.5% ...
until 11.5% and then 12%.
Is the relationship...

Bond P is a premium Bond with a coupon rate of 8.5 percent. Bond
D is a discount Bond with a coupon rate of 4.5 percent. Both Bonds
make annual payments, have a YTM of 6.5 percent, a par value of
$1,000, and have ten years to maturity.
If interest rates remain unchanged, what is the expected capital
gains yield over the next year for Bond P?
If interest rates remain unchanged, what is the expected capital
gains yield over...

A bond of Visador Corporation pays $80 in annual interest,
with a $1,000 par value. The bonds mature in 18 years. The
market's required yield to maturity on a comparable-risk bond is
8.5 percent.
a. Calculate the value of the bond.
b. How does the value change if the market's required yield to
maturity on a comparable-risk bond (i) increases to 11percent or
(ii) decreases to 5 percent?
c. Interpret your finding in parts a and b.
a. What is...

Which of the following statements regarding bond prices and
market interest rates are most likely to be true? Interest rate
risk can be described as the changes in market interest rates that
will cause fluctuations in a bond’s price. Bond prices and market
interest rates are negatively related to each other. Coupon paying
bonds will trade at a premium to their face value because of the
future cash flows expected by bond investors.

A bond has a $1,000 par value, makes annual coupon rate of 10%,
has 5 years to maturity, cannot be called, and is not expected to
default. The bond should sell at a premium if market interest rates
are below 10% and at a discount if interest rates are greater than
10%.
T/F

Consider a 10 year bond with a coupon rate of 7% and annual
coupon payments. Draw a graph showing the relationship between the
price and the interest on this bond. The price should be on the
y-axis and the interest rate on the x-axis. To compute the various
prices, consider interest rates between 2% and 12% (use 0.5%
increments). So your x-axis should go from 2%, then 2.5% … until
11.5% and then 12%. Is the relationship linear (i.e. is...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 1 minute ago

asked 5 minutes ago

asked 25 minutes ago

asked 52 minutes ago

asked 56 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago