Fin111 Tutorial 9

CHAPTER 8  Bond Valuation and the Structure of Interest place   captious Thinking Questions        8.6?Explain why affixation prices and awake grade be negatively related. What is the role of the verifier rate and term-to- due date in this relationship?   Bond prices and lodge in range are negatively related because the market rate varies, while the voucher rate is constant over the life of the mystify. Thus, as place increase, make and adherence prices of existing seizes decline, while newer bonds with coupon rates at the current rate are in great demand. o For a given change in interest rates, eight-day-term bonds live greater price changes (price volatility) than shorter-term bonds. Longer-term bonds have more(prenominal) of their cash in flows further in the future, and their present value will be bring down due to the compounding effect. In addition, the longer it takes for investors to father the cash flows, the more uncertainty they have to treat with and hence the more price-volatile the bond will be. o press down coupon bonds are more price volatile than higher(prenominal) coupon bonds. The similar argument used above to a fault explains this relationship. The trim back the coupon on a bond, the greater the symmetry of cash flows that investors receive at maturity.          8.

9?An investor holds a 10-year bond paying a coupon of 9 per centime. The expect to maturity of the bond is 7.8 per cent. Would you expect the investor to be holding a par-value, premium, or discount bond? What if the succumb to maturity was 10.2 per cent? Explain.   Since t he bonds coupon of 9 per cent is greater tha! n the consequence to maturity, the bond will be a premium bond. As market rates of interest drop below the coupon rate of the 9 per cent bond, demand for the bond increases, whimsical up the price of the bond above face value. If the yield to maturity is at 10.2 per cent, because the bond is paying a lower coupon than the sledding market rate and will be less engaging to investors. The demand for the 9 per cent bond will...If you want to stay put a full essay, battle array it on our website: BestEssayCheap.com

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