As the price of a bond a. rises; rises Ob. falls; falls c. rises; falls O d. falls; rises and the expected return. , bonds become more attractive to investors and the quantity demanded rises.
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- 3. Bond prices and yields (S3.1) Construct some simple examples to illustrate your answers to the following:[S1] Prices of existing bonds move upward as marketinterest rates move downward. [S2] Assuming the samenominal interest rate, the investment with the higher riskwill have a higher value.Choose from liquidity premium, taxability premium, default risk premium, maturity premium. 1.For a long term bond, bondholders demand a higher yield as compensation is called?2.When a bond has poor credit rating, bondholders demand a higher yield as compensation is called?3.When a bond has less frequent trading, bondholders demand a higher yield as compensation is called?
- As interest rates, and consequently investors' required rates of return, change over time, the ________ of outstanding bonds will also change. a. price b. par value c. coupon interest payment d. maturity dateAssume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity?According to the expectations theory of the term structure, O a when the yield curve is steeply upward-sloping, short-term interest rates are expected to rise in the future. O b. when the yield curve is downward-sloping, short-term interest rates are expected to decline in the future. O c. buyers of bonds prefer short-term to long-term bonds. O d. all of the above. O e. only A and B of the above.
- Which of the following statements is/are most CORRECT? O 11 A yield curve depicts the relationship between bond's 'time to maturity and its yield to maturity. 2) A premium bond's price will decline over time if the required return remains unchanged. 3) A discount bond's price will decline over time if the required return remains unchanged. 4) Both a and b are correct.H4. Which statement is true? a. Duration is good for estimating the impact of large interest rate changes. b. The duration estimate is less accurate, the less convex the bond price/yield relationship. c. Effective duration is used to measure the price risk of the bonds with call options. d. The tangent line always overestimates the actual priceA bond’s expected return is sometimes estimated by its yield to maturity (YTM) and sometimes by its yield to call (YTC). The YTC is a better estimate when the bond sells at... a. a discount. b. a premium. c. par value.
- 2. Bond valuation The proces value of the cash flows that the security will generate in the future s of bond valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present There is a consistent and predictable relationship between a bond's coupon rate, its par value, a bondholder's required return, and the bond's resulting intrinsic value. value and its par value. These result from the relationship between a bond's coupon rate and a bondholder's required rate of return Trading at a discount, trading at a premium, and trading at par refer to particular relationships between a bond's intrinsic pay, and a bondholder's required return Remember, a bond's coupon rate partially determines the interest-based return that a bond reflects the return that a bondholder to receive from a given investment. The mathematics of bond valuation imply a predictable relationship between the bond's coupon rate, the bondholder's required return,…During a period of economic expansion, when expected profitability is high, the demand curve for bonds shifts to the left.the supply curve of bonds shifts to the right.the equilibrium interest rate falls.the equilibrium price of bonds risesAn option free bond’s value/price has an inverse relationship with interest rates/yield. If yields increase, the value of a bond decreases