Question

Suppose you were given two bonds, A & B. How do you tell which is more sensative to an interest rate change (price volatility)

Answer #1

The bond which has a higher maturity or a higher coupon is more sensitive to an interest rate change. As the coupon rate increases the sensitivity to interest rate changes is higher because the investors compare the market interest rates to the coupon offered by the bond. Higher the difference greater will be the sensitivity.

Similarly a bond with a higher maturity period will be more volatile because due to higher maturity there is a greater chance of interest rate fluctuations.

(b) Suppose there are two bonds with the same yield-to-maturity
and date to mature; but one is sold at premium, the other one is
sold at discount. Could you tell me which bond has a higher coupon?
Why?
(c) Is there any difference in prices between these two bonds
mentioned in (b) at the end of their duration? Why?
Short Answer

a) You are considering two bonds. Bond A has a 6% annual coupon
while Bond B has a 5% annual coupon. Both bonds have a 7% yield to
maturity, and the YTM is expected to remain constant. Which of the
following statements is CORRECT?
a.
The price of Bond A will decrease over time, but the price of
Bond B will increase over time.
b.
The prices of both bonds will decrease over time, but the price
of Bond A...

An investor has two bonds in his portfolio that have a face
value of $1,000 and pay a 10% annual coupon. Bond L matures in 17
years, while Bond S matures in 1 year.
a. What will the value of the Bond L be if the going interest
rate is 7%, 8%, and 11%? Assume that only one more interest payment
is to be made on Bond S at its maturity and that 17 more payments
are to be made...

An investor has two bonds in his portfolio that have a face
value of $1,000 and pay a 12% annual coupon. Bond L matures in 20
years, while Bond S matures in 1 year.
A. What will the value of the Bond L be if the going interest
rate is 7%, 8%, and 13%? Assume that only one more interest payment
is to be made on Bond S at its maturity and that 20 more payments
are to be made...

If the tax-exempt status of municipal bonds were abolished, how
would the interest rate on these bonds change? How would the
interest rate on US treasury bonds change? Use graphs to explain
the changes in both markets.

For electromagnetic waves, how do you tell which direction the
wave is propagating? And when switching between E and B using E=cB,
how do you know which way the other wave is propagating? Using this
general format -- > E=Esin(kz-wt) and B=Bsin(kz-wt)

Yields on short-term bonds tend to be more volatile than yields
on long-term bonds. Suppose that you have estimated that the yield
on 20-year bonds changes by 7.5 basis points for every
25.65-basis-point move in the yield on 5-year bonds. You hold a $1
million portfolio of 5-year maturity bonds with modified duration 4
years and desire to hedge your interest rate exposure with T-bond
futures, which currently have modified duration 9 years and sell at
F0 = $80. How...

Yields on short-term bonds tend to be more volatile than yields
on long-term bonds. Suppose that you have estimated that the yield
on 20-year bonds changes by 7.5 basis points for every
22.95-basis-point move in the yield on 5-year bonds. You hold a $1
million portfolio of 5-year maturity bonds with modified duration 4
years and desire to hedge your interest rate exposure with T-bond
futures, which currently have modified duration 9 years and sell at
F0 = $80. How...

An investor has two bonds in his portfolio that have a face
value of $1,000 and pay an 11% annual coupon. Bond L matures in 20
years, while Bond S matures in 1 year.
What will the value of the Bond L be if the going interest rate
is 7%, 9%, and 12%? Assume that only one more interest payment is
to be made on Bond S at its maturity and that 20 more payments are
to be made on...

An investor has two bonds in his portfolio that have a face
value of $1,000 and pay an 8% annual coupon. Bond L matures in 16
years, while Bond S matures in 1 year.
What will the value of the Bond L be if the going interest rate
is 5%, 6%, and 9%? Assume that only one more interest payment is to
be made on Bond S at its maturity and that 16 more payments are to
be made on...

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