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Questions and Answers
What happens to the price of a bond when interest rates decrease?
What happens to the price of a bond when interest rates decrease?
- The price of the bond decreases.
- The price of the bond remains the same.
- The price of the bond increases. (correct)
- The price of the bond fluctuates unpredictably.
How is the price of a bond defined when its coupon rate is equal to the market interest rate?
How is the price of a bond defined when its coupon rate is equal to the market interest rate?
- The bond is sold at par. (correct)
- The bond price is subject to fluctuations.
- The bond is sold at a discount.
- The bond is sold at a premium.
Which factor influences long-term bonds more significantly than short-term bonds?
Which factor influences long-term bonds more significantly than short-term bonds?
- Bond maturity dates.
- Inflation rates.
- Market demand for bonds.
- Interest rate changes. (correct)
If a 7.50% coupon bond is currently valued at $1,209.43, what can be inferred about the market interest rate?
If a 7.50% coupon bond is currently valued at $1,209.43, what can be inferred about the market interest rate?
In bond valuation, what is the relationship between coupon payment (C) and yield rate (R) if a bond is selling at a premium?
In bond valuation, what is the relationship between coupon payment (C) and yield rate (R) if a bond is selling at a premium?
What is the primary purpose of bonds?
What is the primary purpose of bonds?
How is the coupon rate on a bond expressed?
How is the coupon rate on a bond expressed?
Which statement regarding the coupon rate and the discount rate is true?
Which statement regarding the coupon rate and the discount rate is true?
What does the price of a bond represent?
What does the price of a bond represent?
In bond calculations, which abbreviation is commonly used for coupon?
In bond calculations, which abbreviation is commonly used for coupon?
What must be consistent when performing bond calculations on a financial calculator?
What must be consistent when performing bond calculations on a financial calculator?
Given a bond with a $1,000 face value and a 7.50% coupon rate, how would the cash flows be calculated?
Given a bond with a $1,000 face value and a 7.50% coupon rate, how would the cash flows be calculated?
If the required return for a bond is 3.00%, what type of relationship exists with bond prices?
If the required return for a bond is 3.00%, what type of relationship exists with bond prices?
What is the price of the 7.50% annual coupon bond with a $1,000 face value maturing in 4 years if the required return is 3.00%?
What is the price of the 7.50% annual coupon bond with a $1,000 face value maturing in 4 years if the required return is 3.00%?
How is the discount rate adjusted when calculating the present value of a bond with semiannual coupon payments?
How is the discount rate adjusted when calculating the present value of a bond with semiannual coupon payments?
What is the total cash flow from the 7.50% coupon bond if it pays $37.50 twice each year for 4 years?
What is the total cash flow from the 7.50% coupon bond if it pays $37.50 twice each year for 4 years?
If a bond matures in 4 years and pays semiannual coupons of $37.50, how many total coupon payments will the investor receive?
If a bond matures in 4 years and pays semiannual coupons of $37.50, how many total coupon payments will the investor receive?
What is the formula to calculate the price of a bond given its par value and price percentage?
What is the formula to calculate the price of a bond given its par value and price percentage?
Which change occurs when switching from annual to semiannual coupon payments in bond pricing?
Which change occurs when switching from annual to semiannual coupon payments in bond pricing?
What will be the price percentage of a $1,000 coupon bond priced at $1,167.27?
What will be the price percentage of a $1,000 coupon bond priced at $1,167.27?
How does the number of cash flows change when a bond pays coupons semiannually instead of annually?
How does the number of cash flows change when a bond pays coupons semiannually instead of annually?
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Study Notes
Bonds
- Bond: A security where the issuer is obligated to make specific payments to the bondholder.
- Face Value (Par Value, Principal Value): Payment at the maturity of the bond.
- Coupon: Interest payments made to the bondholder.
- Coupon Rate: Annual interest payment as a percentage of face value.
Interest Rates and Bond Prices
- The Price of a Bond: The present value of all cash flows generated by the bond (interest and principal) discounted at the required rate of return.
- Formula:
PV = (cpn / (1 + r)^1) + (cpn / (1 + r)^2) + ... + ((cpn + par) / (1 + r)^t)cpn: Coupon paymentr: Required rate of returnt: Time to maturity
- Bond Price Calculation:
- Bond prices are quoted as a percentage of par value (Face Value).
- Par Value x Price % = Price
- Semi-Annual Coupon Payments:
- Time periods are doubled (half-years).
- The discount rate becomes the half-year rate.
- Inverse Relationship Between Interest Rates and Bond Prices:
- When interest rates rise, bond prices fall.
- When interest rates fall, bond prices rise.
Interest Rate Risk
- Long-term bonds are more sensitive to changes in interest rates than short-term bonds.
Premium and Discount Bonds
- Par Value: When the coupon rate equals the required rate of return.
- Premium Bond: When the coupon rate is greater than the required rate of return.
- Discount Bond: When the coupon rate is less than the required rate of return.
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