The rise and fall of a bond's price has a direct inverse relationship to its yield to maturity, or interest rate. As prices go up, the yield declines and vice versa. For example, a $1,000 bond might carry a stated annual yield, known as the coupon of 8%, meaning that it pays $80 a year to the bondholder. If that bond was bought for $870, the actual yield to maturity would be 9.2% ($80 annual interest on $870 of principal). Do you agree with this analysis? Briefly explain.

The rise and fall of a bond's price has a direct inverse relationship to its yield to maturity, or interest rate. As prices go up, the yield declines and vice versa. For example, a $1,000 bond might carry a stated annual yield, known as the coupon of 8%, meaning that it pays $80 a year to the bondholder. If that bond was bought for $870, the actual yield to maturity would be 9.2% ($80 annual interest on $870 of principal). Do you agree with this analysis? Briefly explain.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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What is TRUE about the inverse relationship between price and yield:I. when interest rates rise; bond prices fallII. interest rates have no effect on the price of a zero-coupon bondIII. when yields go up; prices go downIV. the yield on a 30-year bond goes up when interest rates go up
Consider the zero coupon Treasury bond yield curve. Suppose a 1 year bond has a yield of 2.13%. The yield curve slopes downwards between maturities of 1 year and 3 years, and then slopes upwards. Which of the following must be true? Group of answer choices A) The yield of a zero coupon bond with maturity 5 years is higher than 2.13%. B) A 1 year positive coupon bond must have a lower price than the zero coupon bond with the same maturity. C) Bond purchasers believe the Fed will decrease rates in the short run, and then increase them in the long run. D) The economy will be in a recession within 2 years. E) C and D.
Suppose 2-year Treasury bonds yield 4.2%, while 1-year bonds yield 3.4%. r* is 1%, and the maturity risk premium is zero. Negative expected inflation rates, if any, should be indicated by a minus sign. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places. % What is the expected inflation rate in Year 1? Do not round intermediate calculations. Round your answer to two decimal places. %What is the expected inflation rate in Year 2? Do not round intermediate calculations. Round your answer to two decimal places. %
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 is callable. The probability of default is zero. Consider the case of Eades Corp.: Eades Corp. 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 $980.35. However, Eades Corp. 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 Eades Corp.’s bonds? Value YTM YTC If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Eades Corp.’s bonds? 8 years 18 years 5 years 13 years If Eades Corp. issued new bonds today, the coupon rate must be for the bonds…
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 % %
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 probability of default is zero. The bond is callable. Consider the case of Eades Corp.: Eades Corp. 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 Value is $1,010.35. However, Eades Corp. 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 Eades Corp.'s bonds? YTM YTC
(a) You hold a consol that pays a coupon C in perpetuity. The current interest rate is i, and the average expectation in the market is that this will remain unchanged. What will be the price of the consol today? (b) In the next period however, the interest rate changes unexpectedly to i 0 . What is the new price of the bond? If the bond is sold at the beginning of that next period, what is the yield from the consol? Does the yield increase or decrease if i 0 > i? (c) Suppose alternatively that the market expects that the interest rate will change to i 0 after the initial period. What is the initial value of the consol, and what is the yield from selling it after one period?
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. What
a) You hold a consol that pays a coupon in perpetuity. The current interest rate is i , and the average expectation in the market is that this will remain unchanged. What will be the price of the consol today? b) In the next period however, the interest rate changes unexpectedly to i 0. What is the new price of the bond? If the bond is sold at the beginning of that next period, what is the yield from the consol? Does the yield increase or decrease if 0 > i?
Which are TRUE about the inverse relationship between price and yield: a. when interest rates rise; bond prices fall b. interest rates have no effect on the price of a zero-coupon bond c. when yields go up; prices go down d. the yield on a 30-year bond goes up when interest rates go up
Suppose 2-year Treasury bonds yield 4.1%,while 1-year bonds yield 3.2%. r* is 1%, and the maturity risk premium is zero.a. Using the expectations theory, what is the yield on a 1-year bond, 1 year from now?Calculate the yield using a geometric average.b. What is the expected inflation rate in Year 1? Year 2?
Bond A is a 4% coupon (paid semi-annually) with 3 years to maturity and $100 face value per contract. The yield curve is flat at 8% per annum. a) Compute the bond's Macaulay Duration. b) Compute the bond's Modified Dollar Duration. c) Yield curves take various shapes, therefore, it is important to understand why these yield curves shift and change slope over time. There are a number of theories and hypotheses of interest rate determination that attempt to explain their shape. Identify and delzribe three (3) of these theories or hypotheses giving examples of each.

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