Prices of low coupon bonds are more sensitive to interest rate changes than prices of high coupon bonds”. Discuss the given statement using hypothetical example. PE Corp. bondholders require a return of 12% on their investment. The bonds carry a coupon of 7½% and they will mature after
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“Prices of low coupon bonds are more sensitive to interest rate changes than prices of high
coupon bonds”. Discuss the given statement using hypothetical example.
PE Corp. bondholders require a return of 12% on their investment. The bonds carry a coupon of
7½% and they will mature after 7 years. Find the market price of one of these bonds.
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- You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% 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? State your reason for the answer. The price of Bond A will decrease over time, but the price of Bond B will increase over time. The price of Bond B will decrease over time, but the price of Bond A will increase over time. The prices of both bonds will remain unchanged. The prices of both bonds will increase by 7% per year. The prices of both bonds will increase by 9% per year.Yield to maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate of return under certain assumptions. Which of the following is one of those assumptions? The bond will not be called. The bond has an early redemption feature. Consider the case of BTR Co.: YTM YTC BTR Co. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,100.35. However, BTR Co. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on BTR Co.'s bonds? Value If interest rates are expected to remain constant, what is the best estimate of the remaining life left for BTR Co.'s bonds? 13 years 10 years 5 years 8 years If BTR Co. issued new bonds today, what coupon rate must the bonds have to be issued at par?The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy a bond with an annual coupon of 10 percent for $1,120. The bond has 17 years to maturity. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b- Two years from now, the YTM on your bond has declined by 1 percent and you 1. decide to sell. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b- What is the HPY on your investment? (Do not round intermediate calculations and 2. enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Expected rate of return b-1. Bond price b-2. HPY % %
- The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy a bond with an annual coupon of 11 percent for $1,130. The bond has 18 years to maturity. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-1. Two years from now, the YTM on your bond has declined by 1 percent and you decide to sell. WhatA security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates. Based on the graph, which of the following statements is true? Both bonds have equal interest rate risk. The 10-year bond has more interest rate risk. Neither bond has any interest rate risk. The 1-year bond has more interest rate risk. Frank Barlowe is retiring soon, so he’s concerned about his investments providing him with a steady income every year. He’s aware that if interest rates , the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in interest rates might lead to annual income from his investments. What kind of risk is Frank most concerned about protecting…. Risks of investing in bonds A security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates. Based on the graph, which of the following statements is true? Neither bond has any interest rate risk. The 1-year bond has more interest rate risk. Both bonds have equal interest rate risk. The 10-year bond has more interest rate risk. Which type of bonds offer a higher yield? Noncallable bonds Callable bonds Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, the shorter a bond’s maturity, the more its price will change in response to a given change in interest rates. False True
- The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy a bond with an annual coupon rate of 10 percent for $1, 120. The bond has 17 years to maturity. What rate of return do you expect to earn on your investment?The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy a bond with an annual coupon rate of 7 percent for $1,160. The bond has 15 years to maturity. What rate of return do you expect to earn on your investment? Assume a par value of $1,000. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b- Two years from now, the YTM on your bond has declined by 1 percent, and you 1. decide to sell. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b- What is the HPY on your investment? (Do not round intermediate calculations and 2. enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Expected rate of return b-1. Bond price b-2. HPY % I %The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy an annual coupon bond with a coupon rate of 8.3 percent for $785. The bond has 8 years to maturity and a par value of $1,000. What rate of return do you expect to earn on your investment? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b-1. Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b-2. What is the HPY on your investment? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Rate of return b-1. Price b-2. Holding period…
- Solve the following questions without using Excel. A 5 year bond with a coupon of 7%, that pays interest annually, has its next coupon due in 12 months. It yields 5% per annum. a) compute the duration of the bond. Use this to compute approximately how the price of the bond will change if yields rise to 6%. (b) Compute the convexity of the bond. Use this to obtain a more precise estimate of the change in the price which will occur if the yield rises to 6%.The Expectations theory suggests that under certain conditions all bonds outstanding, especially Treasury bonds, must have identical total returns over a 1-year holding period, independently of their final maturity. suppose that today’s interest rate on a 2-year default free zero-coupon Treasury bond that pays $100 at maturity (0i0,2) is 6%. What is today’s price of such a bond (that is, what would you pay to purchase such a bond)?The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy an annual coupon bond with a coupon rate of 8.4 percent for $825. The bond has 8 years to maturity and a par value of $1,000. What rate of return do you expect to earn on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-1. Two years from now, the YTM on your bond has declined by 1 percent, and you decide to sell. What price will your bond sell for? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b-2. What is the HPY on your investment? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) X Answer is complete but not entirely correct. Rate of return…