Question

1. A 10-year bond is issued with a face value ofK1,000, paying interest of K60 a year. If

market yields increase shortly after the T-bond is issued, what happens to the bond’s

a. Coupon rate?

b. Price?

c. Yield to maturity?

1. A 10-year bond is issued with a face value ofK1,000, paying interest of K60 a year. If

market yields increase shortly after the T-bond is issued, what happens to the bond’s

a. Coupon rate?

b. Price?

c. Yield to maturity?

Answer 1

Given for a 10 year bond,

Face value = K1000

Interest = K60

So, if market yield increases, following changes will occur to the bond,

a). Coupon rate will not change as it is a fixed payment yearly for the bond.

b). Price of the bond changes when the yield in the market changes. So, when yield increase, people will shift to the bonds providing greater yield and so the demand for this bond will decrease. As demand decrease, price will also decrease.

So, when yield increases, price of the bond will decrease.

c). Yield to maturity of the bond change when price of the bond change. from part b, we have seen that the price of the bond will increase. Yield to maturity and price of the bond are always inversely proportional to each other.

So, when price decrease, yield to maturity will increase.