Answered: What is interest rate (or price) risk?…

What is interest rate (or price) risk? Which bondhas more interest rate risk: an annual payment1-year bond or a 10-year bond? Why?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 14MC

See similar textbooks

Related questions

Q: What is the price of the following quarterly bond? years face value: maturity: coupon rate: discount…

Q: True or false? the YTM is the annual return that an investor earns on a bond of the investor…

A: Yield to maturity:The yield to maturity is defined as the total annual returns or earnings expected…

Q: Calculate the value of the bond shown in the following table, assuming it pays interest annually?

A: Par value (FV) = $500 Coupon rate = 11% Coupon amount (C) = 500*0.11 = $ 55 Required return (r) = 9%…

Q: j. If interest rates increase after a bond issue, the yield-to-maturity will ______,

A: if interest rates increase then the then the return will increases then automatically yield to…

Q: Which one of the following bonds has the lowest interest rate risk? A. 8-year, zero coupon B.…

A: Interest rate risk refers to the loss which is caused from an adverse interest rate movements. An…

Q: What are the risks embedded in long position in bond in which the face value is 1,000 EUR?

A: Hi There, Thanks for posting the questions. As per our Q&A guidelines, must be answered only one…

Q: Which of the following securities has the lowest interest rate risk? 5% bond, 20-year maturity 5%…

A: Interest rate risk refers to that risk in which value of a financial asset or a financial security…

Q: d. What was your nominal holding period rate of return over the two years that you held the bond? e.…

A: Answer to (d): Nominal holding period rate of return is the return where the investor receives…

Q: The YTM on a three year bond is 5%. What is the average expected short rate over the life of the…

A: The yield to maturity (YTM) is the percentage rate of return of a one year on a bond if the asset is…

Q: If the current yield of a bond goes down from 6.3% to 4.8%, by what percent does the market price…

Q: a What is the yield of the following bond if interest (coupon) is paid quarterly? (Round to two…

A: Yield to Maturity is referred to as an annual rate of return and the expected from a bond if the…

Q: at what price do you expect the bond to sell a year from now? If it helps, you may use

A: Information Provided: Par value = $1000 Term = 20 years Price of bond = $925 Coupon rate = 9%…

Q: What is the current yield of a bond whose face value is P33,200 and pays a yearly interest of 13.7%…

A: Calculate the annual coupon amount of the bond by multiplying the face value of the bond which is…

Q: Which has morereinvestment rate risk: a 1-year bond or a 10-yearbond?

A: It refers to the reinvestment of cash flows in the future at the rate lower than the current rate.

Q: According to the expectations theory of the term structure of interest, if the 1-year bond rate…

A: 2 Year Bond 1 year from now = (1+rate 3 )^3 / (1+rate 2)^1

Q: What are the YTMS of the 1 through 14 year zero coupon bonds?

A: The YTM of a bond is the rate of return that the investor receives if they hold the bond till…

Q: What is the price of the following bond? years face value: maturity: coupon rate: discount rate:…

A: Face value or maturity value (MV) = $1,000 Maturity period (m) = 50 years Coupon rate = 0.10 Annual…

Q: How does the equation for valuing a bond change if semiannual payments are made? Find the value of a…

A: The value of a bond is the present value of all the future expected coupon payments made and the…

Q: What is the default risk premium on Aaa corporate bond, if the interest rate on that bond is 3.25…

A: Solution: The treasury securities are default risk free securities because these are issued by the…

Q: Assume that the real risk-free rate is 2% and the average annual expected inflation rate is 4%. The…

A: Details: risk-free rate =2% inflation rate = 4% DRP and LP for Bond A = 2% MRP =3%. interest rate =…

Q: What does it mean when we say a bond has a 10- year maturity, 5% annual coupon rate and AAA rating?

A: Year to maturity is the time period after which the bond will be redeemed. Coupon rate is the amount…

Q: Describe a way to estimate the inflation premium(IP) for a t-year bond.

A: Answer: The acronym for TIPS is Treasury Inflation-Protected Securities. They are indexed to…

Q: What is the current price of a S1,000 face value Beta Movers' bond?

A: Introduction: Bond can be defined as a financial security issued by companies in order to raise…

Q: a rate of 7.75% on the bonds. What is the bonds' coupon rate?

A: Coupon rate is the interest paid for the bond. It is the fixed rate rate of return which accrues…

Q: What is the coupon rate for the bond? Assume semi-annual payments. Answer as a percent! Bond Coupon…

Q: Interest Rate Risk Which has greater interest rate risk, a 30-year Treasury bond or a 30-year BB…

A: Interest rate risk is the risk associated with the change in interest rates. The price of a…

Q: What is the duration of a 12 year bond paying semiannual interest at a rate of 9.5% with a yield to…

A: Par value of bond = $ 1000 Coupon rate = 9.5% Semi annual coupon amount = 1000*0.095*0.50 = $…

Q: i) If investors have demanded an interest rate of 5 percent on the bond investment, what is the…

A: Bond price is the present value of future cash flows associated with bond discounted at a rate of…

Q: (a) What is the annual dollar amount of interest that you receive from your bond investment? (Do not…

A: Information Provided: Coupon rate = 6.5% Fave value = $1000 Comparabel coupon rate = 7%

Q: If the interest rates on 1-, 5-, 20-, and 30-year bonds are (respectively)4%, 5%, 6%, and 7%, then…

A: Bond yield is the rate which an investor expects to receive from the investment in bonds. In other…

Q: maturity. If the market rate of interest is 10%, the bonds should sell for:

A: Information Provided: Face value = $1000 Coupon rate = 12% Years to Maturity = 15

Q: Consider a 12%, 15 year bond that pays interest semiannually, and its current price is $675. What is…

A: Yield to maturity is the rate of return a bondholder will get if receive promise future cash flows…

Q: What is the value of the following semi-annual bond? years face value: maturity: coupon rate:…

A: Present value of bond is calculated with the help of NPV method of capital budgeting techniques.…

Q: a. What is the maturity of the bond (in years)? b. What is the coupon rate (as a percentage)? c.…

A: A bond is defined as the financial instrument that is used to raise capital from the market at a…

Question

What is interest rate (or price) risk? Which bond
has more interest rate risk: an annual payment
1-year bond or a 10-year bond? Why?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

What do you have to do to the interest rate and years of maturity if a bond pricing problem tells you that interest is compounded quarterly?
What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)
What is the stand-alone risk? Use the scenario data to calculate the standard deviation of the bonds return for the next year.
Describe and differentiate between a bonds (a) current yield and (b) yield to maturity. Why are these yield measures important to the bond investor? Find the yield to maturity of a 20-year, 9 percent, 1,000 par value bond trading at a price of 850. Whats the current yield on this bond?
Which has morereinvestment rate risk: a 1-year bond or a 10-yearbond?
if interest rates increase after a bond issue, the yeild-to-maturity will.......................?
Describe a way to estimate the inflation premium(IP) for a t-year bond.
Which type of bonds will have more volatile prices and returns? A. 30-year Treasuries B. 10-year Treasuries
What is a discount ask yield on a bond? if the bond is priced at 1,000 and 80 days to maturity and has a discount ask yield of 3.4%?
The rate of return that you would earn if you bought a bond and held it to its maturity date is called the bond’s yield to maturity, or YTM. If interest rates in the economy rise after a bond has been issued, what will happen to the bond’s price and to its YTM? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond’s price?
The rate of return that you would earn if you bought a bond and held It to its maturity date is called the bond's yield to maturity (YTM). If Interest rates in the economy rise after a bond has been issued, what will happen to the bond's price and to Its YTM? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond's price? Briefly explain with necessary numerical data.
What is the default risk premium on Aaa corporate bond, if the interest rate on that bond is 3.25 percent and the interest rate on a Treasury security is 1.16 percent?