Reconciliation of the two empirical observations that the price and yields to maturity of long term bonds are more volatile than short term bonds. Introduction: In long term bonds, the issuer pay higher interest rates for exchange of more security. The short term bonds have minimum period for maturity,but they provide a higher liquidity.

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Answer 1

Question

Chapter 16, Problem 1PS

Summary Introduction

To determine: Reconciliation of the two empirical observations that the price and yields to maturity of long term bonds are more volatile than short term bonds.

Introduction: In long term bonds, the issuer pay higher interest rates for exchange of more security. The short term bonds have minimum period for maturity,but they provide a higher liquidity.

Expert Solution & Answer

Answer to Problem 1PS

Short term bonds are more volatile in terms of yields to maturity and long term bonds are more volatile in terms of price.

Explanation of Solution

Given Information:

Prices and yields to maturity for both long and short terms of bond are given.

As in Short term bonds, the yielding amount is low the risk factor involved is minimum. On the other hand the long term bonds pose agreater risk, because the investor’s money is locked up for longer period. There would be chances of price fluctuations.

In long term bond, the maturity period is higher in comparison to the short term bonds. So, the price in long term is more sensitive than that of the short term bonds.

The rate of charged interests may be fluctuating with higher duration than the near future. So, yields to maturity in short term bonds are more volatile.

Hence, the long duration of maturity period makes the long term bonds more volatile in price but less volatile in terms of interest.

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Students have asked these similar questions

Price of short-term bond are less volatile than long-term bonds. But yield to maturity of long-term bonds are less volatile than short-term bonds. How do you reconcile these observations? View keyboard shortcuts

You are given the following data: Real Risk-Free Rate 4% Constant inflation premium 7% Maturity risk premium 1% Default risk premium for AAA bonds 3% Liquidity premium for long term T bonds 2% Assume that a highly liquid market does not exist for long term bonds, and the expected rate of inflation is constant. Given these conditions: a. nominal risk-free rate for T bills is? b. the rate of the long term treasury bonds is?

The values of outstanding bonds change whenever the going rate of interest changes. Ingeneral, short-term interest rates are more volatile than long-term interest rates. Therefore,short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Is that statement true or false? Explain. (Hint: Make up a “reasonable” examplebased on a 1-year and a 20-year bond to help answer the question.)

Answer 2

Question

Chapter 16, Problem 1PS

Summary Introduction

To determine: Reconciliation of the two empirical observations that the price and yields to maturity of long term bonds are more volatile than short term bonds.

Introduction: In long term bonds, the issuer pay higher interest rates for exchange of more security. The short term bonds have minimum period for maturity,but they provide a higher liquidity.

Expert Solution & Answer

Answer to Problem 1PS

Short term bonds are more volatile in terms of yields to maturity and long term bonds are more volatile in terms of price.

Explanation of Solution

Given Information:

Prices and yields to maturity for both long and short terms of bond are given.

As in Short term bonds, the yielding amount is low the risk factor involved is minimum. On the other hand the long term bonds pose agreater risk, because the investor’s money is locked up for longer period. There would be chances of price fluctuations.

In long term bond, the maturity period is higher in comparison to the short term bonds. So, the price in long term is more sensitive than that of the short term bonds.

The rate of charged interests may be fluctuating with higher duration than the near future. So, yields to maturity in short term bonds are more volatile.

Hence, the long duration of maturity period makes the long term bonds more volatile in price but less volatile in terms of interest.

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Answer 3

Question

Chapter 16, Problem 1PS

Summary Introduction

To determine: Reconciliation of the two empirical observations that the price and yields to maturity of long term bonds are more volatile than short term bonds.

Introduction: In long term bonds, the issuer pay higher interest rates for exchange of more security. The short term bonds have minimum period for maturity,but they provide a higher liquidity.

Expert Solution & Answer

Answer to Problem 1PS

Short term bonds are more volatile in terms of yields to maturity and long term bonds are more volatile in terms of price.

Explanation of Solution

Given Information:

Prices and yields to maturity for both long and short terms of bond are given.

As in Short term bonds, the yielding amount is low the risk factor involved is minimum. On the other hand the long term bonds pose agreater risk, because the investor’s money is locked up for longer period. There would be chances of price fluctuations.

In long term bond, the maturity period is higher in comparison to the short term bonds. So, the price in long term is more sensitive than that of the short term bonds.

The rate of charged interests may be fluctuating with higher duration than the near future. So, yields to maturity in short term bonds are more volatile.

Hence, the long duration of maturity period makes the long term bonds more volatile in price but less volatile in terms of interest.

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Answer 4

Question

Chapter 16, Problem 1PS

Summary Introduction

To determine: Reconciliation of the two empirical observations that the price and yields to maturity of long term bonds are more volatile than short term bonds.

Introduction: In long term bonds, the issuer pay higher interest rates for exchange of more security. The short term bonds have minimum period for maturity,but they provide a higher liquidity.

Expert Solution & Answer

Answer to Problem 1PS

Short term bonds are more volatile in terms of yields to maturity and long term bonds are more volatile in terms of price.

Explanation of Solution

Given Information:

Prices and yields to maturity for both long and short terms of bond are given.

As in Short term bonds, the yielding amount is low the risk factor involved is minimum. On the other hand the long term bonds pose agreater risk, because the investor’s money is locked up for longer period. There would be chances of price fluctuations.

In long term bond, the maturity period is higher in comparison to the short term bonds. So, the price in long term is more sensitive than that of the short term bonds.

The rate of charged interests may be fluctuating with higher duration than the near future. So, yields to maturity in short term bonds are more volatile.

Hence, the long duration of maturity period makes the long term bonds more volatile in price but less volatile in terms of interest.

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Answer 5

Chapter 16, Problem 1PS

Summary Introduction

To determine: Reconciliation of the two empirical observations that the price and yields to maturity of long term bonds are more volatile than short term bonds.

Introduction: In long term bonds, the issuer pay higher interest rates for exchange of more security. The short term bonds have minimum period for maturity,but they provide a higher liquidity.

Expert Solution & Answer

Answer to Problem 1PS

Short term bonds are more volatile in terms of yields to maturity and long term bonds are more volatile in terms of price.

Explanation of Solution

Given Information:

Prices and yields to maturity for both long and short terms of bond are given.

As in Short term bonds, the yielding amount is low the risk factor involved is minimum. On the other hand the long term bonds pose agreater risk, because the investor’s money is locked up for longer period. There would be chances of price fluctuations.

In long term bond, the maturity period is higher in comparison to the short term bonds. So, the price in long term is more sensitive than that of the short term bonds.

The rate of charged interests may be fluctuating with higher duration than the near future. So, yields to maturity in short term bonds are more volatile.

Hence, the long duration of maturity period makes the long term bonds more volatile in price but less volatile in terms of interest.

Answer 6

Chapter 16, Problem 1PS

Summary Introduction

To determine: Reconciliation of the two empirical observations that the price and yields to maturity of long term bonds are more volatile than short term bonds.

Introduction: In long term bonds, the issuer pay higher interest rates for exchange of more security. The short term bonds have minimum period for maturity,but they provide a higher liquidity.

Expert Solution & Answer

Answer to Problem 1PS

Short term bonds are more volatile in terms of yields to maturity and long term bonds are more volatile in terms of price.

Explanation of Solution

Given Information:

Prices and yields to maturity for both long and short terms of bond are given.

As in Short term bonds, the yielding amount is low the risk factor involved is minimum. On the other hand the long term bonds pose agreater risk, because the investor’s money is locked up for longer period. There would be chances of price fluctuations.

In long term bond, the maturity period is higher in comparison to the short term bonds. So, the price in long term is more sensitive than that of the short term bonds.

The rate of charged interests may be fluctuating with higher duration than the near future. So, yields to maturity in short term bonds are more volatile.

Hence, the long duration of maturity period makes the long term bonds more volatile in price but less volatile in terms of interest.

Answer 7

Chapter 16, Problem 1PS

Summary Introduction

To determine: Reconciliation of the two empirical observations that the price and yields to maturity of long term bonds are more volatile than short term bonds.

Introduction: In long term bonds, the issuer pay higher interest rates for exchange of more security. The short term bonds have minimum period for maturity,but they provide a higher liquidity.

Answer 8

Expert Solution & Answer

Answer to Problem 1PS

Short term bonds are more volatile in terms of yields to maturity and long term bonds are more volatile in terms of price.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

Given Information:

Prices and yields to maturity for both long and short terms of bond are given.

As in Short term bonds, the yielding amount is low the risk factor involved is minimum. On the other hand the long term bonds pose agreater risk, because the investor’s money is locked up for longer period. There would be chances of price fluctuations.

In long term bond, the maturity period is higher in comparison to the short term bonds. So, the price in long term is more sensitive than that of the short term bonds.

The rate of charged interests may be fluctuating with higher duration than the near future. So, yields to maturity in short term bonds are more volatile.

Hence, the long duration of maturity period makes the long term bonds more volatile in price but less volatile in terms of interest.

Answer 12

Ch. 16 - Prob. 1PS Ch. 16 - Prob. 2PS Ch. 16 - Prob. 3PS Ch. 16 - Prob. 4PS Ch. 16 - Prob. 5PS Ch. 16 - Prob. 6PS Ch. 16 - Prob. 7PS Ch. 16 - Prob. 8PS Ch. 16 - Prob. 9PS Ch. 16 - Prob. 10PS

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Answer to Problem 1PS

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