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?
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?
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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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?
Transcribed Image Text:A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5
years at a call price of $1,040. The bond sells for $1,100. (Assume that the bond has just
been issued.)
Basic Input Data:
Years to maturity:
Periods per year:
Periods to maturity:
Coupon rate:
Par value:
Periodic payment:
Current price
Call price:
Years till callable:
Periods till callable:
20
2
8%
$1,000
$1,100
$1,040
5
a. What is the bond's yield to maturity?
Peridodic YTM =
Annualized Nominal YTM
b. What is the bond's current yield?
Current yield
c. What is the bond's capital gain or loss yield?
Cap. Gain/loss yield =
d. What is the bond's yield to call?
Peridodic YTC =
Annualized Nominal YTC
Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted.
This is a nominal rate, not the effective rate. Nominal rates are generally quoted.
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