Construct some simple examples to illustrate your answers to the following: a. If interest rates fall, do...

60.1K

Verified Solution

Question

Finance

Construct some simple examples to illustrate your answers to thefollowing:
a. If interest rates fall, do bond prices rise or fall?
b. If the bond yield to maturity is less than the coupon, is theprice of the bond greater or less than the par value?
c. If the price of a bond is below the par value, is the yieldto maturity greater or less than the coupon?
d. Do low-coupon bonds sell at higher or lower prices thanhigh-coupon bonds?
e. If interest rates change, do the prices of high-coupon bondschange proportionately more than that of low-coupon bonds?

Answer & Explanation Solved by verified expert

4.2 Ratings (648 Votes)

a If interest rates fall do bond prices rise or fall Bond price is inversely related to interest rates or YTM Hence if interest rate falls prices of the bond rises Example Assume a zero coupon bond of face value 1000 and with 5 years maturity and yield of 8 Price Face value 1 yn 1000 1 85 68058 Lets say interest rate falls by 1 That is YTM y 8 1 7 HEnce Price now 1000 1 75 71299 Thus price of the bond rises when interest rate falls b If the bond yield to maturity is less than the coupon is the price of the bond greater or less than the par value If the bond yield to maturity is less than the coupon the bond is trading See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Construct some simple examples to illustrate your answers to thefollowing:a. If interest rates fall, do bond prices rise or fall?b. If the bond yield to maturity is less than the coupon, is theprice of the bond greater or less than the par value?c. If the price of a bond is below the par value, is the yieldto maturity greater or less than the coupon?d. Do low-coupon bonds sell at higher or lower prices thanhigh-coupon bonds?e. If interest rates change, do the prices of high-coupon bondschange proportionately more than that of low-coupon bonds?