Question

A security will pay an investor a cash flow of $50 every 6 months for 10 years and a lump sum of $1000 at maturity in 10 years. The price of this security is currently $750. Which of the following is true?

		If demand for this security increases then the yield should increase
		If demand for this security increases then the yield should decrease
		If demand for this security increases then the effective rate should increase
		If demand for this security increases then the payment amount should increase

All else equal, which of the following characteristics would lead to a higher yield for a bond?

		Unsecured, short-term, and higher rating.
		Higher Price, less risky, and higher rating.
		Lower Price, rated, and more seniority.
		More Risky, lower rating, and unsecured.

Answer 1

Question 1:

If demand for the security increases then the price of that security would go up and if price goes up then the yield would decrease. So it means if demand for the security increases then the yield would decrease.

Question 2:

If demand for the security increases then the yield would decrease. In a similar way, if we want a higher yield then the price of the security should be low. So the answer is Lower Price, rated, and more seniority.

But on the other hand if you want more yield you need to take more risk. If you want to get more yield then you should chose a bond with more risky, lower rating, and unsecured.

From the above two options it is much better to chose "more risky, lower rating, and unsecured" because even a high rated bond with a low price wouldn't always get higher yield but a bond with more risk will definitely get higher yields and at the same time it is also possible to get higher losses too.