5. In which situation will demand for bonds decrease? a) When wealth increases b) When expected interest rates increase c) When expected inflation decreases d) When expected return of bonds relative to other assets increases
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- 3. If interest rates rise, prices of short-term bonds will decline less than long-term bonds. Is this true or false? Why?1. When inflation increases, does that increase, decrease, or have no effect on the credit spread for a corporate bond?10. Suppose that interest rates decrease. Assuming all other parameters that impact the price of bonds and stocksremain constant, what would you expect to happen to bond and stock prices?a. Bond prices would increase and stock prices would decrease.b. Bond prices would decrease and stock prices would decrease.c. Bond prices would decrease and stock prices would increase.d. Bond prices would increase and stock prices would increase.e. Stock prices would increase. More information would be needed to determine the impact on bond prices. 11. Which of the following bonds would have the smallest change in price (in percentage terms) for a givenchange in interest rates (i.e., yield to maturity) – that is, if the yield to maturity on a bond increases from 8%to 10%, all else constant, which of the following bond prices will change the least (in percentage terms)?a. A $1000 par value bond with a 10% coupon rate (annual payments) that matures in 2 years.b. A $1000 par value bond with a 10%…
- Which one of the following statements is NOT true? As interest rates increase, bond prices increase. Interest rate risk is the risk that bond prices will change as interest rates change. Interest rate changes and bond prices are inversely related. Long-term bonds have more price volatility than short-term bonds of similar riskWould you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation that the inflation is expected to decline in the near future? Explain.3. (T/F) If interest rates rise, prices of short-term bonds will decline less than long-term bonds
- Assume that inflation is expected to rise soon. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation?The time value of money is used in calculating bond prices because: Group of answer choices A - The company might choose to repay the bonds prior to their maturity date B - Bond investors receive future payments and purchase bonds with current dollars C - The amount to be repaid at maturity will change as market rates change D - Cash interest payments to bondholders will change as market rates change57. Which of the following statements is incorrect about bonds? In all ofthe statements, assume other things are held constant.a. Price sensitivity, that is, the change in price due to a given changein the required rate of return, increases as a bond’s maturityincreases.b. For a given bond of any maturity, a given percentage point increasein the interest rate (kd) causes a larger dollar capital loss thanthe capital gain stemming from an identical decrease in the interestrate.c. For any given maturity, a given percentage point increase in theinterest rate causes a smaller dollar capital loss than the capitalgain stemming from an identical decrease in the interest rate.d. From a borrower’s point of view, interest paid on bonds is taxdeductible.e. A 20-year zero coupon bond has less reinvestment rate risk than a 20-year coupon bond.
- Explain the impact of a decline in interest rates on the present value of existing bonds.Explain how does a bond par value differs from its market value? Are variable rate bonds attractive to investors who expect the interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future? Explain.What is the relationship between…. a) bond prices and yields? b) bond prices and interest rates? c) why are bond prices important to many financial institutions?