Question

1a. As the maturity of the loan increases, the interest rate quoted on that loan increases because of the increase in maturity premium.

True

False

1b.

Which of the following is correct for the company's bond price when the default risk of that company increases (when the future prospect of the company becomes poor)?

		YTM increases therefore the price of the bond increases
		YTM decreases therefore the price of the bond decreases
		YTM decreases therefore the price of the bond increases
		YTM increases therefore the price of the bond decreases

1c.

Which of the following is correct for the relationship between bond prices and interest rates?

		Bond prices and interest rates are directly related. This means that when interest rates go up, the bond prices go up as well,
		Bond prices and interest rates are not related at all.
		Bond prices and interest rates are inversely related. This means that when interest rates go up, bond prices go down.
		None

Answer 1

Answers-

1a)

The statement is True.
The longer the term to maturity, the greater the interest rate risk and interest rate is high so the interest rate risk premium increases with maturity

1b)

The correct Option is last option. YTM increases therefore the price of the bond decreases.

The default risk of that company increases the Yield to Maturity increases as the risk increases therefore the investor requires mor yield and as the YTM increases the bond prices decreases as YTM and bond prices move inversely.  

1c)

The correct Option is third Option.
Bond prices and interest rates are inversely related. This means that when interest rates go up, bond prices go down.

As the interest rates increase the YTM increases and bond prices increases.

The other Options are incorrect.