Question

In: Finance

Perform instant experiments on whether changing various inputs causes an increase or decrease in the Bond...

Perform instant experiments on whether changing various inputs causes an increase or decrease in the Bond Price and by how much.

(A) What happens when the annual coupon rate is increased?

(B) What happens when the yield to maturity is increased?

(C) What happens when the number of payments / year is increased?

(D) What happens when the face value is increased?

(E) What is the relationship between the price of a par bond and time to maturity? Try this question both when the YTM = coupon rate, and when YTM ≠ coupon rate, and see the differences.

(F) What happens when the annual coupon rate is increased to the point that it equals the yield to maturity? What happens when it is increased further?

Expert Solution

As per rules I am answering the first 4 subparts of the question

Assuming the following:

BOND A
Coupon	4.00%
Face value	1000
Frequency	1
Maturity	8
Yield	5.00%

Original price =

935.368

a: Whenannual coupon increases by 1%, price increases by 14.11%

b: With 1% increase in YTM, price decreases by 6.37%

c: With no of payments increasing from 1 to 4, price decreases by 0.1%

d: With 100% increase in face value, price increases by 100%

Workings

BOND A		Coupon increase		YTM Increase		No of payments per year		Face value increases
Coupon	4.00%	Coupon	5.00%	Coupon	4.00%	Coupon	4.00%	Coupon	4.00%
Face value	1000	Face value	1000	Face value	1000	Face value	1000	Face value	2000
Frequency	1	Frequency	1	Frequency	1	Frequency	4	Frequency	1
Maturity	8	Maturity	8	Maturity	8	Maturity	8	Maturity	8
Yield	5.00%	Yield	4.00%	Yield	6.00%	Yield	5.00%	Yield	5.00%

Price	935.368	Price	1,067.327	Price	875.804	Price	934.397	Price	1,870.736
		% Change	14.11%	% Change	-6.37%	% Change	-0.10%	% Change	100.00%

jeff jeffy answered 4 months ago

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