1. Bonds with longer maturities will always have lower prices than bonds pf shorter maturities with...
1. Bonds with longer maturities will always have lower prices than bonds pf shorter maturities with the same coupon due to time value of money. True or False
Homework Answers
TRUE
bond having FV 100 aand coupon rate of 8%, Re=10%.
Bond A maturies in 5 Years
Price = coupon*PVaf(10%,5) + FV*PVif(10%,5)
Price = 8 * 3.7908 + 100 * 0.6209
Price = 92.42
Bond B matures in 1 years.
Price = 108 * (1/1.1^1) i.e. 108*0.9091 = 98.18
As in the above example Both bond have everything same except the maturity and we have seen bond A longer maturity has lower price as compared to Bond B. It is because that every time we dicount the cash flow with the multiple of 10%, decrease the cash flow and so is the lower prices.
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