Question

1. Consider a five year bond with a 10% coupon that is presently trading at a yield to maturity of 8%. If market rates do not change, one year from now the price of this bond _____________.
   1. Will be higher
   2. Will be lower
   3. Will be the same
   4. Cannot be determined from the information given

2. A bond’s sensitivity to interest rate changes _____________ at a(n) _______________ rate as maturity lengthens.
   1. increases; decreasing
   2. decreases; decreasing
   3. increases, increasing
   4. decreases, decreasing

Answer 1

HI,

As a bond goes near its maturity, its price goes nearer to its fair/par value.

As you can see in first question, coupon rate =10% and Yield = 8%.

We know that bond price is inversely proportionate to its yield to maturity.

So if yield to maturity is lower than coupon rate that means bond price is higher than par value.

So in this case let say par value =$1000

so bond price is higher than par value that means more than $1000

so if market rate does not change then as bond goes near maturity then its price its price will decrease and goes near $1000(par value).

So after one year bond price will be lower

For second question,   sensitivity of bond meaning how much bond price changes with change in interest rate. As maturity increases, bond's sensitivity to interest rate also increase but at decreasing rate.

So a bond's sensitivity to interest rate changes increases at a decreasing rate as maturity lengthens

Thanks