Questions On The New Tips And Traditional Treasury Bonds

The value of a bond is found as the present value of interest payments plus

 10. The interest rate used to compute the present value of a future cash flow is called the:

If rates increase, then both bonds lose value because they are discounted at a higher rate. But the inverse Floater will also lose value because the coupon payments decrease. The opposite holds when rates decrease. Therefore, the price impact is greater for Inverse Floaters than for Straight Bonds.

The first kind of risk that could affect the bonds is credit risk. There is a chance that the bond could be defaulted, which means that the yield rate will decrease.

2. What is the difference between the coupon rate and the YTM of bonds? (10 pts)

Correct Answer:    Question: Compute the duration of a par value bond with a coupon rate of 8% and a remaining time to maturity of 3  years. Assume coupon interest is paid annually and the bond has a face value $100.  Correct Answer:    Question: The duration of a bond that pays coupon interest annually is 8.05 years. The yield to maturity of the bond  is 10%. If the yield falls by 25 basis points, what is the percentage change in the price of the bond?  Correct Answer:    Question: Which of the following are true about the interest‐rate sensitivity of coupon bonds?   I     Bond prices and yields are inversely related.  II    Prices of long‐term bonds tend to be more sensitive to interest rate changes than prices of short‐term bonds.  III   Interest‐rate risk is directly related to the bond's coupon rate.  IV    The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at  which the bond is currently selling.    Correct Answer:    Question:  You have an obligation to pay $148 in four years and 2 months. In which bond would you invest your  $100 to accumulate this amount, with relative certainty, even if the yield on the bond declines to 9.5% immediately  after you purchase the bond? All bonds pay interest annually and have a face value of $100.     Selected Answer:

9F: If the yield changes by 100 base points, from 8% to 7%, by how much would you approximate the percentage price change to be using your estimate of duration in part (e)?

Which of the following is the most likely order of the interest rates (yields to maturity) of the bonds from highest to lowest?

Higher interest rates make stocks less attractive compared to bonds. However, bonds released previously to the rate hike will become less attractive than newly issued bonds, unless, of course, they carry a floating interest rate. Net result will be bond prices declining.

24. Which one of the following statements is correct? .D. The present value of an annuity increases when the interest rate decreases.25. The annual interest on a bond divided by the bond's market price is called the: B. current yield.

In your own words, explain why your bond increased or decreased in value. This bond increased in value because you owned a bond with a fixed interest rate of 9.5 percent during a time period when interest rates in the economy were declining.

| O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years.  Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850.  What is the bond's nominal (annual) coupon interest rate?

5. Would higher or lower rates increase the incomes of agents? Explain, distinguish between the short run and the long run.

B. The market rate of interest is below the contract rate of interest for the bond.

A fixed rate offers a set percentage of the face value, meaning that the investor will know exactly how much the coupon will pay each time until maturity, due to the fixed rate. On the other hand, a floating rate bonds have their coupon payments determined by the market. In the U.S., this is determined by the US Treasury rate, LIBOR, or prime rate/fed funds. These floating bonds are typically issued with 2-5 year maturity terms, and typically by governments, banks, and other financial institutions. In the event of a floating rate, the bond issuer should fully make aware to the buyer the method of interest.