Fin111 Tutorial 9

CHAPTER 8 
Bond Valuation and the Structure of Interest Rates
 
captious Thinking Questions 
 
 
 
8.6?Explain why affixation prices and raise grade be negatively related. What is the role of the verifier esteem and term-to-maturity in this relationship?
 
Bond prices and interest rates are negatively related because the market rate varies, while the coupon rate is constant over the life of the bond. Thus, as rates increase, make and bond prices of existing bonds decline, while newer bonds with coupon rates at the current rate are in greater demand.
o For a given change in interest rates, longer-term bonds live greater price changes (price volatility) than shorter-term bonds. Longer-term bonds have more(prenominal) of their cash in flows further in the future, and their present value will be bring down due to the compounding effect. In addition, the longer it takes for investors to father the cash flows, the more uncertainty they have to deal with and hence the more price-volatile the bond will be.
o Lower coupon bonds are more price volatile than higher coupon bonds. The similar argument used above also explains this relationship. The lower the coupon on a bond, the greater the proportion of cash flows that investors receive at maturity.
 
 
 

 
8.



9?An investor holds a 10-year bond paying a coupon of 9 per centime. The expect to maturity of the bond is 7.8 per cent. Would you expect the investor to be holding a par-value, premium, or discount bond? What if the yield to maturity was 10.2 per cent? Explain.
 
Since the bonds coupon of 9 per cent is greater than the yield to maturity, the bond will be a premium bond. As market rates of interest drop below the coupon rate of the 9 per cent bond, demand for the bond increases, driving up the price of the bond above face value.
If the yield to maturity is at 10.2 per cent, because the bond is paying a lower coupon than the sledding market rate and will be less engaging to investors. The demand for the 9 per cent bond will...If you want to stay put a full essay, order it on our website: Orderessay



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