Question

3. Consider what you know about bonds and bond valuation: a. Describe the relationship between interest...

3. Consider what you know about bonds and bond valuation:
a. Describe the relationship between interest rates (yields) and bond prices. (5)

b. Explain, in words and graphically, the progression in price of par, discount, and premium bonds as the bonds move forward in time to their maturity. (5)

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Homework Answers

Answer #1

a. Bond Price =
where, C=coupon, y=yield and F = face value.
Hence, bond Price is inversely proportional to the interest rate (yield).

b.

  • Price of Par Bond remains constant (at par value) with respect to maturity.
  • Price of a discount bond increases to the par value as the bonds move forward in time to their maturity.
  • Price of a premium bond decreases to the par value as the bonds move forward in time to their maturity.

Please do rate me and mention doubts, if any, in the comments section.

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