As investors' required rate of return on a bond increases, the value of the bond increases...

As investors' required rate of return on a bond increases, the value of the bond increases also. a. True b. False

Expert Solution

When investors buy bonds, the price of the bond changes
when the interest rates change. In other words, when the
interest rates increase the bond prices decrease.

The cash flow from the bond consists of coupon payments and the
principal amount at maturity.
Present Value = Future value/ ((1+r)^t)
where r is the interest rate and t is the time period in years.
Lets say the bond has the following cash flows
Year	1	2	3	4	5
future cash flow	100	100	100	100	1100
present value	100/((1+r)^1)	100/((1+r)^2)	100/((1+r)^3)	100/((1+r)^4)	1100/((1+r)^5)

price of the bond = sum of present values of future cash flows

When the interest rate increases the present value of future cash flows and (as a consequence) the price of the
bond decreases.

As investors required rate of return on the bond increases, the value of the bond decreases.

The statement in the question is FALSE.

jeff jeffy answered 1 year ago

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