Homework Answers
A bond's sensitivity to changes in market interest rates decreases as time to maturity decreases (option II) and coupon rate increases (option III). Suppose interest rates increase then for a bond with 2 year maturity, one would be earning lower returns for 2 years compared to a bond with say, 10 year maturity which would earn lower returns for 10 years vis-a-vis the higher market interest rates. So, bonds with longer maturity are more affected by changes in interest rates than bonds with lower maturity.
Similarly, when coupon rates are higher then more cash flows are available to the investor before maturity so when interest rates rise then lower coupon bonds have more comparatively more cash flow in the far off future so the major part of the total cash flow will be closer to maturity of the bond than before. As a result, the bond price today will fall more compared to a higher coupon bond.
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Question 12 (0.5 points) A bond's sensitivity to changes in market interest rates decreases when the:...
? Question 19 (Mandatory) (0.5 points) A bond's current yield is defined as: the bond's annual...
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Question 19 (Mandatory) (0.5 points) A bond's current yield is defined as: the bond's annual coupon rate divided by the bond's current market price. O the bond's annual coupon rate divided by the bond's original issue price. O the bond's annual coupon rate divided by the market interest rate. O the bond's annual coupon rate divided by the bond's par value. Question 20 (Mandatory) (0.5 points) Which of the following is a reason municipal bonds offer lower rates of...
True or false? The lower the level of interest rates, the greater a bond's price sensitivity...
True or false? The lower the level of interest rates, the greater a bond's price sensitivity to interest rate changes.
1. The term structure of interest rates refers to the relationship between _____. a bond's time to maturity and its coupon rate a bond's age since issue and its coupon rate a bond's age si...
1. The term structure of interest rates refers to the relationship between _____. a bond's time to maturity and its coupon rate a bond's age since issue and its coupon rate a bond's age since issue and its yield a bond's time to maturity and its yield. 2. The yield on 12-month treasury bills is 1.4% and the yield on 2-year treasury STRIPS is 2%. a. What is the implied 1-year forward rate one year from now? 3. The term...
Question 4: (10 points). (Yield to maturity) A bond's market price is $950. It has a...
Question 4: (10 points). (Yield to maturity) A bond's market price is $950. It has a $1,000 par value, will mature in 14 years, and has a coupon interest rate of 8 percent annual interest, but makes its interest payments semiannually. What is the bond's yield to maturity? What happens to the bond's yield to maturity if the bond matures in 28 years? What if it matures in 7 years? (Round to two decimal places.) The bond's yield to maturity...
Problem 13-03 The Clarence Corporation has issued bonds that pay semiannually with the following characteristics: Coupon...
Problem 13-03 The Clarence Corporation has issued bonds that pay semiannually with the following characteristics: Coupon Yield to Maturity Maturity Macaulay Duration 10% 10% 13 7.55 years a. Calculate modified duration using the information provided. Do not round intermediate calculations. Round your answer to two decimal places. Use only the data provided in the table above (in the problem statement) for your calculations. years b. What is a better measure when calculating the bond's sensitivity to changes in interest rates?...
Why the modified duration is more effective than maturity when you need to calculate the bond's s...
Why the modified duration is more effective than maturity when you need to calculate the bond's sensitivity to changes in interest rates?
If interest rates did not change from now until this bond's maturity,a bond with a yield...
If interest rates did not change from now until this bond's maturity,a bond with a yield of 7% and a coupon rate of 8% would: Group of answer choices: A) it would not be trading at all since the coupon does not equal the yield in the market. B) trade at a discount right now. Its price would gradually increase until it reaches par at maturity. C) trade at par. D) trade at a premium right now. Its price would...
If market interest rates increase, investors in corporate bonds will see the current market value of...
If market interest rates increase, investors in corporate bonds will see the current market value of their bonds do what in the secondary market? a. If the market interest rates increase, the coupon rate on the bond increases b. When market interest rates increase, the market value of corporate bonds increase c. Remain the same, because the face value never changes d. When market interest rates increase, the market value of corporate bonds decrease
Q1) Two banks are being examined by regulators to determine the interest rate sensitivity of their...
Q1) Two banks are being examined by regulators to determine the interest rate sensitivity of their balance sheets. Bank A has assets composed solely of a 10-year $1 million loan with a coupon rate and yield of 12 percent. The loan is financed with a 10-year $1 million CD with a coupon rate and yield of 10 percent. Bank B has assets composed solely of a 7-year, 12 percent zero-coupon bond with a current (market) value of $894,006.20 $1,976,362.88. The...
6) Which of the following statements about bonds is true? A) If market interest rates are...
6) Which of the following statements about bonds is true? A) If market interest rates are above a bond's coupon interest rate, then the bond will sell below its par value. B) As the maturity date of a bond approaches, the market value of a bond will become more volatile. C) Bond prices move in the same direction as market interest rates. D) Long-term bonds have less interest rate risk than do short-term bonds.
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Question 19 (Mandatory) (0.5 points) A bond's current yield is defined as: the bond's annual coupon rate divided by the bond's current market price. O the bond's annual coupon rate divided by the bond's original issue price. O the bond's annual coupon rate divided by the market interest rate. O the bond's annual coupon rate divided by the bond's par value. Question 20 (Mandatory) (0.5 points) Which of the following is a reason municipal bonds offer lower rates of...
Question 4: (10 points). (Yield to maturity) A bond's market price is $950. It has a $1,000 par value, will mature in 14 years, and has a coupon interest rate of 8 percent annual interest, but makes its interest payments semiannually. What is the bond's yield to maturity? What happens to the bond's yield to maturity if the bond matures in 28 years? What if it matures in 7 years? (Round to two decimal places.) The bond's yield to maturity...
Problem 13-03 The Clarence Corporation has issued bonds that pay semiannually with the following characteristics: Coupon Yield to Maturity Maturity Macaulay Duration 10% 10% 13 7.55 years a. Calculate modified duration using the information provided. Do not round intermediate calculations. Round your answer to two decimal places. Use only the data provided in the table above (in the problem statement) for your calculations. years b. What is a better measure when calculating the bond's sensitivity to changes in interest rates?...
Q1) Two banks are being examined by regulators to determine the interest rate sensitivity of their balance sheets. Bank A has assets composed solely of a 10-year $1 million loan with a coupon rate and yield of 12 percent. The loan is financed with a 10-year $1 million CD with a coupon rate and yield of 10 percent. Bank B has assets composed solely of a 7-year, 12 percent zero-coupon bond with a current (market) value of $894,006.20 $1,976,362.88. The...
6) Which of the following statements about bonds is true? A) If market interest rates are above a bond's coupon interest rate, then the bond will sell below its par value. B) As the maturity date of a bond approaches, the market value of a bond will become more volatile. C) Bond prices move in the same direction as market interest rates. D) Long-term bonds have less interest rate risk than do short-term bonds.
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