15.2 - BONDS PART 2 PAR Interest Rates Decrease Initially...

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BONDS PART 2
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PAR
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Interest Rates Decrease Initially pay $10,000 for bond when interest rates are 10% If interest rates decrease to 8% WOULD THIS BE AN ATTRACTIVE BOND? WOULD YOU PAY MORE THAN $10,000 FOR THIS BOND?
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Interest Rates Decrease
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Interest Rates Decrease ANSWER: Yes! This bond becomes more attractive when interest rates fall and a buyer would be willing to pay more than $10,000 for it This is because this bond now has a coupon rate higher than the market so it trades at a premium
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Interest Rates Increase Initially pay $10,000 for bond when interest rates are 10% If interest rates increase to 12% WOULD THIS BE AN ATTRACTIVE BOND? WOULD YOU PAY MORE OR LESS THAN $10,000 FOR THIS BOND?
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Interest Rates Rise
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Interest Rates Increase ANSWER: No! This bond becomes less attractive when interest rates rise and a buyer would not be willing to pay more than $10,000 for it This is because this bond now has a coupon rate lower than the market so it trades at a discount
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Long vs. Short-term Bonds
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This note was uploaded on 11/13/2011 for the course CIVE 2*** taught by Professor - during the Spring '11 term at Carleton CA.

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15.2 - BONDS PART 2 PAR Interest Rates Decrease Initially...

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