Podcast
Questions and Answers
What occurs when the yield of a 3% bond rises to 4%?
What occurs when the yield of a 3% bond rises to 4%?
- The bond pays out $4 per $100 of par value.
- The bond becomes more volatile than shorter-term bonds.
- The price of the bond increases to 104.74.
- The price of the bond drops to 95.51. (correct)
How is the overall yield affected when the price of a bond increases due to falling interest rates?
How is the overall yield affected when the price of a bond increases due to falling interest rates?
- It remains the same because the bond is priced at par.
- It fluctuates based on market demand.
- It increases due to higher interest income.
- It decreases due to a capital loss. (correct)
Which statement is true regarding the relationship between bond maturity and price volatility?
Which statement is true regarding the relationship between bond maturity and price volatility?
- All bonds maintain the same level of volatility regardless of maturity.
- Longer-term bonds have fixed prices regardless of market conditions.
- Longer-term bonds are more volatile in price than shorter-term bonds. (correct)
- Shorter-term bonds are more volatile than longer-term bonds.
If a new buyer pays $95.51 for a bond originally valued at $100, what will be the interest income received?
If a new buyer pays $95.51 for a bond originally valued at $100, what will be the interest income received?
What must happen to the price of a bond when its yield falls to 2%?
What must happen to the price of a bond when its yield falls to 2%?
At what interest rate will a 3%, ten-year bond and a 5-year bond both be priced at par?
At what interest rate will a 3%, ten-year bond and a 5-year bond both be priced at par?
What is the combined yield when paying $95.51 for a bond yielding 3%?
What is the combined yield when paying $95.51 for a bond yielding 3%?
What component is affected by the price drop of a bond as its yield increases?
What component is affected by the price drop of a bond as its yield increases?
What is a common misconception regarding bond pricing and yield?
What is a common misconception regarding bond pricing and yield?
What happens to the capital gain when a bond is purchased for less than par value?
What happens to the capital gain when a bond is purchased for less than par value?
How does the price change of a lower-coupon bond compare to a higher-coupon bond when yields rise?
How does the price change of a lower-coupon bond compare to a higher-coupon bond when yields rise?
What effect does the time to maturity have on the volatility of a bond?
What effect does the time to maturity have on the volatility of a bond?
What was the price of the 3% five-year bond when yields decreased to 2%?
What was the price of the 3% five-year bond when yields decreased to 2%?
What happens to the pricing relationship when comparing a 3% bond with a 2% bond, assuming all other factors are constant?
What happens to the pricing relationship when comparing a 3% bond with a 2% bond, assuming all other factors are constant?
When market rates increase from 3% to 4%, what was the percentage price change for the 2% five-year bond?
When market rates increase from 3% to 4%, what was the percentage price change for the 2% five-year bond?
What is the formula used to calculate the semi-annual approximate YTM on the bond?
What is the formula used to calculate the semi-annual approximate YTM on the bond?
What is the impact of lower coupon rates on bond price percentage changes?
What is the impact of lower coupon rates on bond price percentage changes?
Which factor heavily influences the yield to maturity (YTM) of a bond?
Which factor heavily influences the yield to maturity (YTM) of a bond?
How is the annual approximate YTM derived from the semi-annual approximate YTM?
How is the annual approximate YTM derived from the semi-annual approximate YTM?
In the given example of XYZ Corp., what does the 'Coupon' refer to?
In the given example of XYZ Corp., what does the 'Coupon' refer to?
What essential assumption is made when calculating the yield to maturity?
What essential assumption is made when calculating the yield to maturity?
Why might the current yield and YTM differ?
Why might the current yield and YTM differ?
Given the Price of $80 and Maturity Price of $100, what contributes to overall yield?
Given the Price of $80 and Maturity Price of $100, what contributes to overall yield?
What is the key measure for assessing an investment in a bond?
What is the key measure for assessing an investment in a bond?
Which of the following is NOT included in a bond quote?
Which of the following is NOT included in a bond quote?
Which is NOT true about the financial calculator's YTM output?
Which is NOT true about the financial calculator's YTM output?
What is included in the fair price of a bond?
What is included in the fair price of a bond?
At a discount rate of 10%, what is the calculated value of the bond?
At a discount rate of 10%, what is the calculated value of the bond?
What components determine the return of a Treasury bill?
What components determine the return of a Treasury bill?
Which of the following statements about the yield on a T-bill is incorrect?
Which of the following statements about the yield on a T-bill is incorrect?
What does the current yield measure?
What does the current yield measure?
In the yield calculation formula for a T-bill, what does the term 'Term' represent?
In the yield calculation formula for a T-bill, what does the term 'Term' represent?
What would be the yield on an 89-day T-bill purchased for a price of 99.5?
What would be the yield on an 89-day T-bill purchased for a price of 99.5?
Which aspect does not affect the calculation of a bond's current yield?
Which aspect does not affect the calculation of a bond's current yield?
What does the formula for calculating the yield on a T-bill include?
What does the formula for calculating the yield on a T-bill include?
What primarily influences the price of a bond when demand exceeds supply?
What primarily influences the price of a bond when demand exceeds supply?
Which theory explains the relationship between inflation, nominal interest rates, and real interest rates?
Which theory explains the relationship between inflation, nominal interest rates, and real interest rates?
What affects the term structure of interest rates?
What affects the term structure of interest rates?
When market interest rates increase, what is likely to happen to existing bond prices?
When market interest rates increase, what is likely to happen to existing bond prices?
What is the principal factor that determines the yield to maturity (YTM) of a bond?
What is the principal factor that determines the yield to maturity (YTM) of a bond?
What can cause variations in the yield curve?
What can cause variations in the yield curve?
What happens to the yield of a bond if its price rises due to increased demand?
What happens to the yield of a bond if its price rises due to increased demand?
How is the yield curve generally shaped when investors expect economic growth?
How is the yield curve generally shaped when investors expect economic growth?
Which of the following statements regarding the interaction of borrowers and lenders is true?
Which of the following statements regarding the interaction of borrowers and lenders is true?
Which factor does NOT influence the level of interest rates at different terms to maturity?
Which factor does NOT influence the level of interest rates at different terms to maturity?
Study Notes
Present Value of a Bond
- Fair price of a bond includes present value of its principal and coupons.
- At a 10% discount rate, the bond's value is $96.77 ($29.0844 + $67.6839).
Treasury Bills (T-bills)
- T-bills are short-term securities sold at a discount and mature at par value.
- Returns come from the difference between purchase price and maturity value.
- Investor earnings from T-bills are taxed as interest income.
- Yield calculation formula for T-bills:
- Yield = ((100 - \text{Price}) / \text{Price} \times (365 / \text{Term}) \times 100)
- Example: An 89-day T-bill bought at 99.5 yields 2.061%.
Current Yield on Bonds
- Current yield focuses on cash flows and current market price, excluding original investment amount.
- Formula to calculate current yield is applicable to both bonds and stocks.
- Example calculation yields an approximate YTM of 4.9842% for a bond priced at $96.77.
- Annual approximate YTM calculated as 9.9684% (4.9842% × 2).
Yield to Maturity (YTM)
- YTM reflects average return if a bond is purchased today and held until maturity, assuming coupon payments are reinvested at the same YTM.
- Higher differences between bond price and maturity value affect overall YTM.
- Example highlights YTM of 12.50% for XYZ Corp 7% bond when bought at 80.00.
Term Structure of Interest Rates
- Market forces of supply and demand affect bond trading prices and YTM.
- Excess demand results in higher prices and lower YTM.
- Bond prices are also influenced by current market interest rates.
Factors Affecting Interest Rates
- The Fisher Effect illustrates the relationship between inflation rate, nominal interest rate, and real interest rate.
- Changes in bond yield influence pricing:
- If yield rises, bond price decreases.
- If yield falls, bond price increases.
Impact of Maturity
- Long-term bonds exhibit greater price volatility than short-term bonds.
- As bonds approach maturity, their volatility and price changes lessen over time.
Impact of Coupon Rate
- Lower-coupon bonds are more sensitive to price changes compared to higher-coupon bonds.
- Price effects from interest rate changes are more pronounced in lower-coupon bonds.
- Data shows that a 1% increase in yield results in a greater price decline for a 2% coupon bond versus a 3% coupon bond.
Summary
- Understanding bond pricing and yields is crucial for investment decisions.
- Yields are influenced by prevailing market conditions, bond characteristics, and investor actions related to maturity and coupon rate.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Test your knowledge on the present value of bonds, Treasury Bills, and the calculation of current yield and yield to maturity. This quiz covers essential financial concepts and formulas important for understanding bond investments. Dive in and see how well you grasp these topics!
