“Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain.

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Answer 1

Textbook Question

Chapter 4, Problem 2Q

“Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain.

Expert Solution & Answer

Summary Introduction

To discuss: Whether the given statement is true or false.

Explanation of Solution

The prices of short term bond are less sensitive when compared with the prices of long-term bond to the changes in the rate of interest as the funds invested in the short-term bonds could be reinvested at a new rate of interest faster than the funds that are tied up in the long-term bonds.

Hence, the statement is false.

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Consider the following two bonds: Bond A Bond B Face value $1,000 $1,000 Coupon rate (annual) 8% 8% YTM 9% 7% Maturity 10 years 10 years Price (PV) ? ? Calculate the price for each bond. What is the primary factor affecting the prices of the bonds? Indicate which bond is premium and which one is discount. Is there any relationship between the YTM and the coupon rate in case of premium/discount bonds? Now, consider the following two bonds: Bond X Bond Y Face value $1,000 $1,000 Coupon rate (annual) 8% 8% YTM 11% 11% Maturity 5 years 10 years Price (PV) ? ? Calculate the price for each bond. What is the relationship between bond price and maturity, all else equal? A bond with a par value of $1,000 and a maturity of 8 years is selling for $925. If the annual coupon rate is 7%, what’s the yield on the bond? What would be the yield if the bond had semiannual payments?…

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Answer 2

Textbook Question

Chapter 4, Problem 2Q

“Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain.

Expert Solution & Answer

Summary Introduction

To discuss: Whether the given statement is true or false.

Explanation of Solution

The prices of short term bond are less sensitive when compared with the prices of long-term bond to the changes in the rate of interest as the funds invested in the short-term bonds could be reinvested at a new rate of interest faster than the funds that are tied up in the long-term bonds.

Hence, the statement is false.

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Answer 3

Textbook Question

Chapter 4, Problem 2Q

“Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain.

Expert Solution & Answer

Summary Introduction

To discuss: Whether the given statement is true or false.

Explanation of Solution

The prices of short term bond are less sensitive when compared with the prices of long-term bond to the changes in the rate of interest as the funds invested in the short-term bonds could be reinvested at a new rate of interest faster than the funds that are tied up in the long-term bonds.

Hence, the statement is false.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Textbook Question

Chapter 4, Problem 2Q

“Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain.

Expert Solution & Answer

Summary Introduction

To discuss: Whether the given statement is true or false.

Explanation of Solution

The prices of short term bond are less sensitive when compared with the prices of long-term bond to the changes in the rate of interest as the funds invested in the short-term bonds could be reinvested at a new rate of interest faster than the funds that are tied up in the long-term bonds.

Hence, the statement is false.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

Summary Introduction

To discuss: Whether the given statement is true or false.

Explanation of Solution

The prices of short term bond are less sensitive when compared with the prices of long-term bond to the changes in the rate of interest as the funds invested in the short-term bonds could be reinvested at a new rate of interest faster than the funds that are tied up in the long-term bonds.

Hence, the statement is false.

Answer 8

Expert Solution & Answer

Summary Introduction

To discuss: Whether the given statement is true or false.

Explanation of Solution

The prices of short term bond are less sensitive when compared with the prices of long-term bond to the changes in the rate of interest as the funds invested in the short-term bonds could be reinvested at a new rate of interest faster than the funds that are tied up in the long-term bonds.

Hence, the statement is false.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Summary Introduction

To discuss: Whether the given statement is true or false.

Answer 12

Explanation of Solution

The prices of short term bond are less sensitive when compared with the prices of long-term bond to the changes in the rate of interest as the funds invested in the short-term bonds could be reinvested at a new rate of interest faster than the funds that are tied up in the long-term bonds.

Hence, the statement is false.

Answer 13

Ch. 4 - Short-term interest rates are more volatile than...Ch. 4 - The rate of return on a bond held to its maturity...Ch. 4 - If you buy a callable bond and interest rates...Ch. 4 - A sinking fund can be set up in one of two ways....Ch. 4 - Prob. 1P Ch. 4 - Prob. 2P Ch. 4 - Current Yield for Annual Payments Heath Food...Ch. 4 - Determinant of Interest Rates The real risk-free...Ch. 4 - Default Risk Premium A Treasury bond that matures...Ch. 4 - Prob. 6P

“Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain.

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