Suppose that interest rates decrease. Assuming all other parameters that impact the price of bonds and stocks remain constant, what would you expect to happen to bond and stock prices? a. Bond prices would increase and stock prices would decrease. b. Bond prices would decrease and stock prices would decrease. c. Bond prices would decrease and stock prices would increase. d. Bond prices would increase and stock prices would increase. e. Stock prices would increase. More information would be needed to determine the impact on bond prices.
Suppose that interest rates decrease. Assuming all other parameters that impact the price of bonds and stocks remain constant, what would you expect to happen to bond and stock prices? a. Bond prices would increase and stock prices would decrease. b. Bond prices would decrease and stock prices would decrease. c. Bond prices would decrease and stock prices would increase. d. Bond prices would increase and stock prices would increase. e. Stock prices would increase. More information would be needed to determine the impact on bond prices.
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 4QTD
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Question
10. Suppose that interest rates decrease. Assuming all other parameters that impact the price of bonds and stocks
remain constant, what would you expect to happen to bond and stock prices?
a.Bond prices would increase and stock prices would decrease.
b. Bond prices would decrease and stock prices would decrease.
c. Bond prices would decrease and stock prices would increase.
d. Bond prices would increase and stock prices would increase.
e. Stock prices would increase. More information would be needed to determine the impact on bond prices.
remain constant, what would you expect to happen to bond and stock prices?
a.
b. Bond prices would decrease and stock prices would decrease.
c. Bond prices would decrease and stock prices would increase.
d. Bond prices would increase and stock prices would increase.
e. Stock prices would increase. More information would be needed to determine the impact on bond prices.
11. Which of the following bonds would have the smallest change in price (in percentage terms) for a given
change in interest rates (i.e., yield to maturity) – that is, if the yield to maturity on a bond increases from 8%
to 10%, all else constant, which of the following bond prices will change the least (in percentage terms)?
a. A $1000 par value bond with a 10% coupon rate (annual payments) that matures in 2 years.
b. A $1000 par value bond with a 10% coupon rate (semi-annual payments) that matures in 25 years.
c. A $1000 par value bond with a 2% coupon rate (annual payments) that matures in 4 years.
d. A $1000 par value bond with a 2% coupon rate (semi-annual payments) that matures in 30 years.
e. The bond that changes the most (in price percentage terms) cannot be determined from the information
given.
12. Five years ago, ABC Inc. issued 25-year fixed coupon bonds at par. Since that time the bond’s yield-to-
maturity (YTM) has decreased by 1.5%. Based on this information, which of the following is true regarding
the current market price of the bond?
a. The bond is selling at discount.
b. The bond is selling at premium.
c. The bond is selling at book value.
d. The bond is selling at par.
e. Insufficient information.
change in interest rates (i.e., yield to maturity) – that is, if the yield to maturity on a bond increases from 8%
to 10%, all else constant, which of the following bond prices will change the least (in percentage terms)?
a. A $1000 par value bond with a 10% coupon rate (annual payments) that matures in 2 years.
b. A $1000 par value bond with a 10% coupon rate (semi-annual payments) that matures in 25 years.
c. A $1000 par value bond with a 2% coupon rate (annual payments) that matures in 4 years.
d. A $1000 par value bond with a 2% coupon rate (semi-annual payments) that matures in 30 years.
e. The bond that changes the most (in price percentage terms) cannot be determined from the information
given.
12. Five years ago, ABC Inc. issued 25-year fixed coupon bonds at par. Since that time the bond’s yield-to-
maturity (YTM) has decreased by 1.5%. Based on this information, which of the following is true regarding
the current market price of the bond?
a. The bond is selling at discount.
b. The bond is selling at premium.
c. The bond is selling at book value.
d. The bond is selling at par.
e. Insufficient information.
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