You purchased a bond with a par value of $1,000 and a coupon rate of 8...

You purchased a bond with a par value of $1,000 and a coupon rate of 8 percent at a price of $1,100 at the beginning of the year. The price of the bond was $1,000 at the end of the year. Which of the following development(s) could explain this change?

1. The default risk of the bond increased.

2. The YTM of bonds of similar credit risk increased.

3. The YTM of bonds of similar credit risk decreased.

4. The inflation rates increased in line with market expectations.

Group of answer choices 1 and 3

1, 3 and 4

1 only

1 and 2

Solutions

Expert Solution

Answer:

option 1 and 2

Explanation:

Price of the bond has decreased from $1,100 to $1,000

Reasons:

1. The YTM of bonds of similar credit risk increased - There is an inverse relationship between price of the bond and YTM, In this case, YTM increase leading to price of the bond has decreased from 1,100 to 1,000

2. Increase in default risk leading to decrease in bond price because the riskiness of the bond has increased.

In case of any questions, please post in comments section.

jeff jeffy answered 2 years ago

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