In: Finance
Consider three bonds with maturities of 2, 6, and 10 years. All three bonds have a coupon rate of 8% and have face values of $1,000. Assume semiannual coupon payments. Use this information to answer the following questions: a) What would be the market price of each bond if their YTM was 6%? b) What would be the market price of each bond if their YTM was 10%? c) Graph the relationship between bond prices (y-axis) and the YTM (X-axis) for the three bonds. What conclusions can you draw regarding the relationship between time to maturity and the sensitivity of bond prices to changes in interest rates?
What conclusions can you draw regarding the relationship between time to maturity and the sensitivity of bond prices to changes in interest rates?
The effect of YTM will be higher on the bonds with higher maturity than the bonds with lower maturity. When the interest rates increases the bond prices decreases but the decrease will be higher on bonds with higher maturity