Question

In: Finance

When will a bond trade at a premium? Explain. Which bonds will be the most sensitive...

When will a bond trade at a premium? Explain.

Which bonds will be the most sensitive to changes in yields? Explain.

Solutions

Expert Solution

Bond premium = When bond is traded in the secondary market more than its face value.  

There are several reasons why bonds are trading at premium one of the reason is coupon rate of bond is higher than the market interest rate.

If coupon rate is higher then the market interest rate that means bonds is earning more then the general market expectation. More and more people wants to buy the bond and the price of the bonds will increases. Since it is higher return investment.

There are two types of bonds

1. Bonds with longer maturity.

2. Bonds with shorter maturity.

Generally bonds with longer maturity are more sensitive to change in yields. There is inverse relation between bond price and yield, In the long run changes in the market yield will effect the overall return of the bond. However in shorter period bonds are less risky because generally yield in not change in the short period hence risk is less substantial in the short duration as compare to longer duration.  

jeff jeffy answered 7 months ago
Next > < Previous

Related Solutions

Explain what makes bonds more sensitive to discount rate changes, and how Duration measures bond sensitivity....
Explain what makes bonds more sensitive to discount rate changes, and how Duration measures bond sensitivity. Why does higher Duration mean greater sensitivity, and lower Duration less (explain by using the equation, in terms of the present value of the coupon and principle payments)?
Bond Premium, Entries for Bonds Payable Transactions, Interest Method of Amortizing Bond Premium. Campbell, Inc. produces...
Bond Premium, Entries for Bonds Payable Transactions, Interest Method of Amortizing Bond Premium. Campbell, Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $56,000,000 of 20-year, 14% bonds at a market (effective) interest rate of 12%, receiving cash of $64,412,320. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Required: If an amount box does not require an entry, leave it blank...
Bond Premium, Entries for Bonds Payable Transactions, Interest Method of Amortizing Bond Premium. Campbell, Inc. produces...
Bond Premium, Entries for Bonds Payable Transactions, Interest Method of Amortizing Bond Premium. Campbell, Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $64,000,000 of 20-year, 14% bonds at a market (effective) interest rate of 12%, receiving cash of $73,614,080. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Required: If an amount box does not require an entry, leave it blank...
When does a premium on bonds payable occur?
When does a premium on bonds payable occur?
19. Which bond is more sensitive to an interest rate change of 0.75%? Bond A: YTM...
19. Which bond is more sensitive to an interest rate change of 0.75%? Bond A: YTM = 4.00%, maturity = 8 years, coupon = 6% or $60, par value = $1,000. Bond B: YTM = 3.50%, maturity = 5 years, coupon = 7% or $70, par value = $1,000. bond A both are equally sensitive bond B cannot be determined
Because bond prices are sensitive to changes in interest rates: a. bonds hardly ever sell in...
Because bond prices are sensitive to changes in interest rates: a. bonds hardly ever sell in the secondary market at their face value. b. bond prices are constantly changing. c. interest rates in excess of the coupon rate cause the bond to sell at a discount, while interest rates below the coupon rate cause the bond to sell at a premium. d. All of the above How is preferred stock similar to bonds? a. Constant payment b. Pays both principal...
how to create an amortization schedule for bonds that are sold at a premium ($1,000 bond...
how to create an amortization schedule for bonds that are sold at a premium ($1,000 bond is sold for more than $1,000). given facts about a bond sold at a premium, someone should be able to follow your instructions and produce an amortization schedule
Which bond’s price would be the most sensitive to an unexpected change in the interest rate?...
Which bond’s price would be the most sensitive to an unexpected change in the interest rate? Please provide the formula you used, and show your work. a) A bond with a 5% coupon rate and 10 years to maturity b) A zero coupon bond with 15 years to maturity c) A zero coupon bond with 10 years to maturity d) A bond with a 10% coupon rate and 10 years to maturity.
Which bond’s price would be the most sensitive to an unexpected change in the interest rate?...
Which bond’s price would be the most sensitive to an unexpected change in the interest rate? Please provide the formula you used, and show your work.
Please determine the bond discount and premium for $1,000,000 of bonds with an 8% coupon rate,...
Please determine the bond discount and premium for $1,000,000 of bonds with an 8% coupon rate, sold when prevailing market interest rates are at 7% and 9%. How is the discount/premium amortized?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT