A security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates. Based on the graph, which of the following statements is true? Neither bond has any interest rate risk. The 1-year bond has more interest rate risk. Both bonds have equal interest rate risk. The 10-year bond has more interest rate risk. Which type of bonds offer a higher yield? Noncallable bonds Callable bonds Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, the shorter a bond’s maturity, the more its price will change in response to a given change in interest rates. False True
A security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates. Based on the graph, which of the following statements is true? Neither bond has any interest rate risk. The 1-year bond has more interest rate risk. Both bonds have equal interest rate risk. The 10-year bond has more interest rate risk. Which type of bonds offer a higher yield? Noncallable bonds Callable bonds Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, the shorter a bond’s maturity, the more its price will change in response to a given change in interest rates. False True
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Concept explainers
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
. Risks of investing in bonds
A security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important.
The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates.
Based on the graph, which of the following statements is true?
Neither bond has any interest rate risk.
The 1-year bond has more interest rate risk.
Both bonds have equal interest rate risk.
The 10-year bond has more interest rate risk.
Which type of bonds offer a higher yield?
Noncallable bonds
Callable bonds
Answer the following question based on your understanding of interest rate risk and reinvestment risk.
True or False: Assuming all else is equal, the shorter a bond’s maturity, the more its price will change in response to a given change in interest rates.
False
True
Transcribed Image Text:**Understanding Bond Prices at Various Interest Rates**
The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates.
**Graph Explanation:**
- **Title:** Bond Value ($) vs. Interest Rate (%)
- **X-axis:** Interest Rate (%), ranging from 0% to 20%
- **Y-axis:** Bond Value ($), ranging from approximately 250 to 2000
**Curves in the Graph:**
1. **1-Year Bond:**
- Represented by an orange line.
- This line remains relatively steady, showing a slight decline as the interest rate increases.
- Indicates less sensitivity to changes in interest rates compared to the 10-Year Bond.
2. **10-Year Bond:**
- Represented by a blue line.
- This line shows a steep decline as the interest rate increases.
- Indicates higher sensitivity to changes in interest rates compared to the 1-Year Bond.
The graph highlights the inverse relationship between bond prices and interest rates, demonstrating that as interest rates rise, bond prices tend to fall, and vice versa. Long-term bonds (10-Year Bond) are more affected by changes in interest rates compared to short-term bonds (1-Year Bond).
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