Question

1. Which one of the following bonds has the greatest interest rate risk?

a. 10-y & 2% coupon

b. 20-y & 3% coupon

c. 20-y & 4% coupon

d. 20-y & 2% coupon

2. There are two methods used to amortize a loan: fixed principal payment vs. fixed total payment. Under the fixed principal payment approach, what is the observation on the periodic interest payment?

a. The interest payment is increasing over time.

b. The interest payment is decreasing over time.

c. The interest payment does not have any given pattern over time because it will vary with the interest rate that prevails each period.

d. The interest payment is the same every period.

Answer 1

Question 1: "20-y & 2% coupon"

The Bond Value is the present value of all the cash flows that the bind is going to generate till the years to maturity, The discount rate used is the interest rate, when the Years are higher, then the bond value will more fluctuate because of longer discounting period and the lower coupon rate will show larger percentage change in the price

Question 2 : "The interest payment is the same every period"

In Fixed interest rate, the payment of every period is same while in the Flexible interest rate the rate is tied to the market rate which determines the interest payment.

In Fixed exchange rate, A particular rate is decided and the payment has to be made according to that rate, irrespective of the prevailing rates in the market.