Chapter4solutions

Chapter4solutions - Chapter 4 Bond Valuation ANSWERS TO...

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Chapter 4 Bond Valuation ANSWERS TO END-OF-CHAPTER QUESTIONS 4-2 False. Short-term bond prices are less sensitive than long-term bond prices to interest rate changes because funds invested in short-term bonds can be reinvested at the new interest rate sooner than funds tied up in long-term bonds. 4-3 The price of the bond will fall and its YTM will rise if interest rates rise. If the bond still has a long term to maturity, its YTM will reflect long-term rates. Of course, the bond's price will be less affected by a change in interest rates if it has been outstanding a long time and matures shortly. While this is true, it should be noted that the YTM will increase only for buyers who purchase the bond after the change in interest rates and not for buyers who purchased previous to the change. If the bond is purchased and held to maturity, the bondholder's YTM will not change, regardless of what happens to interest rates. 4-4 If interest rates decline significantly, the values of callable bonds will not rise by as much as those of bonds without the call provision. It is likely that the bonds would be called by the issuer before maturity, so that the issuer can take advantage of the new, lower rates. SOLUTIONS TO END-OF-CHAPTER PROBLEMS 4-3 With your financial calculator, enter the following to find the current value of the bonds, so you can then calculate their current yield: N = 7; I/YR = YTM = 8; PMT = 0.09

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Chapter4solutions - Chapter 4 Bond Valuation ANSWERS TO...

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