Homework for Fm
Autor: simba • March 19, 2011 • Essay • 1,349 Words (6 Pages) • 2,060 Views
Q. 6-2
This statement is False. Long term bonds are more sensitive than short term ones because the number of years one is committed to a long term bond is more than that of a short term bond. When the ongoing interest rates decline the holder of the long term bond has a longer period to avail of the high yield on the bond as opposed to the short term bond and hence the price of the long term bond would rise more than a short term bond. Likewise if the ongoing interest rates rise then the holder of the short term bond would have to hold it for a shorter period before he could reinvest it at a higher rate as opposed to the holder of the long term bond and hence the price of the long term bond would fall more than the short term bond.
Q.6-3
If the rates of interest rise after the bond has been issued the price of the bond will fall as the return on the bond is lower than the ongoing interest rate of the market. The length of the maturity does affect the extent to the decline in value of the bond. A bond with a longer period to maturity would decline more than the one having a shorter period to maturity since the holder of the former would have to wait longer at the low yield rate of the bond.
Q. 6-4
We know that as interest rates decline and the prices of bonds rise. But in such cases the price of bonds which are not callable will show are larger increase in value than the ones which are callable since the holder of a callable bond might not be able to enjoy the high yield on the bond until its maturity and might have to sell it back at the call price on the callable date. Hence the value of a callable bond will not rise as much as the value would rise had the bond not been callable
P. 6-6
Both the bonds of the Garraty Company have a Par Value of $1,000 and pay an interest of $100 annually. Hence our calculations for part a) using the Financial Calculator are as below:
a) Value of the bond (VB) as the interest rate changes is shown in the last column
N I FV PMT PV = VB
Bond S 1 5 1,000 100 -1,047.61
Bond L 15 5 1,000 100 -1,518.98
Bond S 1 8 1,000 100 -1,018.51
Bond L 15 8 1,000 100 -1,171.89
Bond S 1 12 1,000 100 -982.14
Bond L 15 12 1,000 100 -863.78
b) As you can see from the last column when the interest rate changes from 5% to 8 % the Value of Bond S reduces from $1,047.61 to $1,018.51
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