Question

a. (2 points) What is the relationship between the price of a bond and its YTM? (i.e. as YTM increases what happens to the bond price) b. (2 points) Explain why some bonds sell at a premium over par value while other bonds sell at a discount. c. (2 points) What do you know about the relationship between the coupon rate and the YTM for premium bonds? (i.e. which one is larger, if either) d. (2 points) What about for discount bonds? e. (2 points) For bonds selling at par value?

Answer 1

A

The simple answer is the lower the price you pay for a bond, the higher the yield to maturity will be.

or when YTM increases the price of bond decreases

And, There is an inverse relationship between market price of the bond and its yield. The higher the market price, the lower the return and the lower the market price the higher the return in bond.

B

The bonds are the instrument that is issued to the investors to collect the capital for the operation of the company. When the bonds are traded into the secondary market it is traded either at a premium or a discount. The bonds are sold at a premium when the rate is higher than the coupon rate of the bond as it provides higher returns and so investors invest their fund on bond at a premium.

The bonds are issued at a discount when the coupon rate is lower than the current market. Such bonds provide less return so when the bonds are issued at a discount, then only the investors become ready to invest in it as they always want to receive a higher return.

C

the YTM is an estimated rate of return that an investor can expect from a bond. This value assumes that you hold the bond until its maturity date. It is also assumed that all interest payments received are reinvested at the same interest rate as the bond itself. Thus, yield to maturity includes the coupon rate within its calculation YTM is also known as the redemption yield.

The coupon rate or yield of a bond is the amount that an investor can expect to receive as they hold the bond. Coupon rates are fixed when the government or corporation issue the bond. Calculation of the coupon rate is from the yearly amount of interest based on the face or par value of the security.

so YTM is larger...

D,E question not clear

if it meant about the coupon rate and YTM which is larger then YTM is larger on both cases

Answer 2

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