Which of the following statements regarding bond prices and market interest rates are most likely to...

Which of the following statements regarding bond prices and market interest rates are most likely to be true?

1. Interest rate risk can be described as the changes in market interest rates that will cause fluctuations in a bond’s price.

2. Bond prices and market interest rates are negatively related to each other.

3. Coupon paying bonds will trade at a premium to their face value because of the future cash flows expected by bond investors.

Expert Solution

Hi

Interest rate risk is the change in the interest rate which affects bond prices.

Bond price are inversely related to interest rates.

Coupon paying bond can trade both at premium and discount to face value. If Interest rate is higher than Coupon then bond will trade at discount. If interest rate is lower than bond will trade at premium.

Hence first and second statements are correct. Third is wrong.

Thanks

jeff jeffy answered 2 years ago

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Which of the following statements regarding bond prices and market interest rates are most likely to...

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