Define the word "bond price elasticity." Would the elasticity of bond prices suggest that zero-coupon or high-coupon bonds with the same yield to maturity have a higher price sensitivity? Why? What does this entail for the market value volatility of zero-coupon Treasury bonds in mutual funds compared to high-coupon Treasury bonds?
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- Give a definition for the term "bond price elasticity." Would the price elasticity of bonds imply that zero-coupon or high-coupon bonds with the same yield to maturity have a greater price sensitivity? Why? What effect does this have on the market value volatility of zero-coupon Treasury bonds held in mutual funds vs high-coupon Treasury bonds?Explain the concept of bond price elasticity. Would bond price elasticity suggest a higher price sensitivity for zero-coupon bonds or high-coupon bonds that are offering the same yield to maturity? Why? What does this suggest about the market value volatility of mutual funds containing zero-coupon Treasury bonds versus high-coupon Treasury bonds?Explain "bond price elasticity." Do zero-coupon or high-coupon bonds with the same yield to maturity have a stronger price sensitivity? Why? What does this mean for the market value volatility of zero-coupon Treasury bonds in mutual funds?
- What does "bond price elasticity" mean? How does the price elasticity of bonds compare to the yield to maturity of zero-coupon bonds? Why? Which means that zero-coupon Treasury bonds are more volatile than high-coupon Treasury bonds in terms of market value.Explain how does a bond par value differs from its market value? Are variable rate bonds attractive to investors who expect the interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future? Explain.Why does the market value differ from its par value when the coupon interest rate does not equal the market yield to maturity on a comparable-risk bond?
- 3. Bond prices and yields (S3.1) Construct some simple examples to illustrate your answers to the following:Bonds. What is the relationship between the price of a bond and its YTM? All else being the same, which has more interest rate risk, a long-term bond or a short-term bond? What about a low coupon bond compared to a high coupon bond? What about a long-term, high coupon compared to a short-term, low coupon bond? Why?Describe the differences between the yield to maturity (YTM) and the yield to call (YTC) on a bond. Why would the return to the investor be different if a bond is called? Justify your answer
- When would it make sense for a firm to call a bond issue? A) when the market price of the bond exceeds the call price, and market interest rates are greater than the bond's coupon rate B) when the market price of the bond exceeds the call price, and market interest rates are less than the bond's coupon rate C) when the market price of the bond is less than the call price, and market interest rates are greater than the bond's coupon rate D) when the market price of the bond is less than the call price, and market interest rates are less than the bond's coupon rateIf a bond’s coupon rate is greater than the investor’s required rate of return on the bond, would the bond’s price be greater than or less than its par value? Explain.Does it make any difference if the coupon rate on a bond is more than the needed rate of return on the bond, as long as the required rate of return is greater than the coupon rate? Explain.
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