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.)

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.)

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 2Q: Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices...

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Bond prices change whenever the market interest rate changes. In general, 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 this statement true or false. Explain your answer by making up a "reasonable" example based on a 1-year and a 20-year bond to help answer the question.
Which of the comments below is the most accurate?a. Long-term bonds have a higher interest rate price danger than short-term bonds, but they have a lower reinvestment rate risk.b. Bonds with higher coupons have higher interest rate price danger, but lower reinvestment rate risk.c. If interest rates stay unchanged for the next five years, the price of a discount bond would still remain unchanged.d. Both b and c are valid statements.e. All of the above claims are true.
Based on the graph, which of the following statements is true? Neither bond has any interest rate risk. The 1-year bond has more interest rate risk. Both bonds have equal interest rate risk. The 10-year bond has more interest rate risk. Which type of bonds offer a higher yield, noncallable bonds or callable bonds? Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, short-term securities are exposed to higher reinvestment risk than long-term securities.
An investor buys a 5-year bond and a 10-year bond. Which statement is true? The interest rate risk is negligible given recent actions by the Federal Reserve. The interest rate risk is higher for the 5-year bond. The interest rate risk is the same for both bonds. The interest rate risk is higher for the 10-year bond.
Which of the following statements is correct? Group of answer choices The actual capital gains yield for a one-year holding period on a bond can never be greater than the current yield on the bond. All of these statements are false. The price of a coupon bond is determined primarily by the number of years to maturity. The discount or premium on a bond can be expressed as the difference between the coupon payment on an old bond which originally sold at par and the coupon payment on a new bond, selling at par, where the difference in payments is discounted at the new market rate. On a coupon paying bond, the final interest payment is made one period before maturity and then, at maturity, the bond's face value is paid as the final payment.
In general, which of the following statements is true about a corporate bond's coupon rate? Group of answer choices It decreases as a bond nears maturity. It is identical to the discounting rate. It changes in sync with market interest rates. It changes every year. It is fixed until the bond matures.
Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?I. Longer-term bonds have more interest rate risk than shorter-term bonds.II. Shorter-term bonds have more interest rate risk than longer-term bonds.III. Longer-term bonds have more reinvestment rate risk than shorter-term bonds.
The rate of return on a bond held to its maturity date is called the bond’syield to maturity. If interest rates in the economy rise after a bond hasbeen issued, what will happen to the bond’s price and to its YTM? Doesthe length of time to maturity affect the extent to which a given change ininterest rates will affect the bond’s price? Why or why not?
Long-term bonds fluctuate more than short-term bonds as interest rates rise, making them a riskier investment. When interest rates rise, bond prices fall. A bond's coupon rate or interest rate determines the annual payment to the issuer. what does this mean?
Which of the following statements is CORRECT? a. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. b. The total yield on a bond is derived from dividends plus changes in the price of the bond. c. Bonds are generally regarded as being riskier than common stocks, therefore bonds have higher required returns. d. Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies. e. The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant. THE ANSWER IS NOT E OR B, apparently, but please let me know if you really think one of those choices are correct.
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.
Which one of the following is the reason that bonds may sell at a discount or premium? Select one: a. Market conditions caused the coupon rate of interest to change between the time the bond agreement was written and the date the bonds were actually issued to investors b. The bond issuer failed to consider the market yield rate when the bond agreement was created c. The bond issuer adjusted the coupon rate to match that of other bond issues d. The market yield rate fluctuated between the time the bond agreement was written and the date the bonds were actually issued to investors