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a rise in risk premium will cause bond market prices to rise? true or false?
Step by step
Solved in 4 steps
- Why does the market value differ from its par value when the coupon interest rate does not equal the market yield to maturity on a comparable-risk bond?Explain why the dirty price of a bond might fall sharply before the next coupon is paid?If the yield curve in the bond market shows a flat curve, what do you think about the prediction of the liquidity premium in explaining this phenomenon? Then do you prefer the prediction of expectation theory in explaining this phenomenon?
- Is the price of a long term bond or the price of a short term security more sensitive to a change in interest rates? Why?Do bondholders fare better when the yield to maturityincreases or when it decreases? Why?Is it true or false? The inflation risk premium theory implies that, in normal circumstances, we can expect an upwards-sloping yield curve in the fixed-interest bond market.
- Is Treasury Bond Yield, the risk free rate? Yes or No. Explain.What is the connection between the interest rate and the price of a fixed coupon bond? Why is this relationship still going strong?Is the price of a long-term (longer-maturity) bond more or less sensitive to changes in interest rates than that of a short-term bond? Why?
- What is the convexity of a coupon bond? Why do investors tend to have a positive view of convexity?Does interest rate risk matter or is it negligible? Why/why not? Will it be important for one who is holding their bond for maturity?Does it make any difference if the coupon rate on a bond is more than the needed rate of return on the bond, as long as the required rate of return is greater than the coupon rate? Explain.
