1a. Which of the following does the sensitivity of the bond price to the changes in...

1a. Which of the following does the sensitivity of the bond price to the changes in interest rates depend on?

		Maturity of the bond
		Coupon rate
		Both maturity of the bond and the coupon rate
		None

`1b. Which of the following is correct when the Coupon Rate of a bond is equal to its Yield to Maturity?

		The price of this bond is equal to its face value.
		The price of this bond is higher than its face value.
		The price of this bond is lower than its face value.
		None.

1c. Which of the following is correct for stocks?

		Cash flows from stocks are known and guarranteed.
		Maturity of stocks is a specific known date.
		The quantity of cash flows (the number of payments) from stocks are unknown.
		End value of stocks are known.

Solutions

Expert Solution

Answer to 1a

The correct answer is Both Maturity and Coupon Rate

The sensitivity of Bond price with respect to Interest Rate is measured is called Duration of the Bond Price.The calculation of Duration multiple bond charecteristics including Maturity and Coupon Rates
Therefore the correct answer is Both Maturity and Coupon Rate

Answer to 1b

The correct Answer is Bond Price = the face value of Bond

The Price of Bond is computed by discounting all the cash flows of the bond using the market rate of retrun . So if the Coupon Rate = the Market Interest Rates the bond price will be equal its par value.

If Coupon Rate is Greater than the Market Rate of Retrun the price of Bond will be greater than the par value.

If Coupon Rate is less than the Market Rate of Retrun the price of Bond will be less than the par value of the bond

Answer to 1c

For stocks the cash flows are the dividend. Morevover the stocks do not have a fized date of redemption nor carrry a fixed par value as in case of bond. The dividend amount are also dependand on the company's growth and payout ratio. There is no fixed mandate to pay the equity shareholders dividends. Therefore niether the cash flows of the stock are gauranteed or its end value. Moreover the stocks do not have any maturity date

Therfore the correct answer is "The quantity of cash flows (the number of payments) from stocks are unknown.".

jeff jeffy answered 1 year ago

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