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In: Finance

Which of the following statements about bonds is most likely to be true? a)The higher the...

Which of the following statements about bonds is most likely to be true?

a)The higher the coupon rate, the lower the price of the bond, holding all else constant.

b)The higher the coupon frequency, the higher the price of the bond, holding all else constant.

c)The higher the yield to maturity, the higher the price of the bond, holding all else constant.

Solutions

Expert Solution

Answer to the question:

a) the given stattement is false;

There is a positive relation in the coupon rate and the price of the bond, as higher the coupon rate higher will be the price and vice versa, because if investor get higher interest in a bond than he will definitely ready to pay more for that.

Hence on the basis of above we can say that the statement given is false.

b) The given statement is false

There is constant relation between the frequency of coupon and the price if the bond. Suppose if we take an example that there are two bonds; Bond A and Bond B, both have YTM of 8% and coupon rate of 10% annually in Bond A and 2.5% per quarter in Bond B, assume all other factors constant the we will find that price of Bond A will comes to 1080 and that of Bond B will comes to 1081 that is approximately equal to price of bond A.

Hence on the basis of above we can say that the statement given is false.

c) Te given statement is false;

We know that thier is a inverse relation between the price of the bond and the YTM of the bond. A bond's price moves inversely with it's YTM. An increase in YTM will decrease the price and vice versa.

Hence on the basis of above we can say that the statement given is false.

jeff jeffy answered 1 year ago
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