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chapter7solution - Questions 7-4 The price of the bond will...

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Unformatted text preview: Questions 7-4 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 bonds 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 bondholders YTM will not change, regardless of what happens to interest rates. For example, consider two bonds with an 8% annual coupon and a $1,000 par value. One bond has a 5-year maturity, while the other has a 20-year maturity. If interest rates rise to 15% immediately after issue the value of the 5-year bond would be $765.35, while the value of the 20-year bond would be $561.85. 7-6 As an investor with a short investment horizon, I would view the 20-year Treasury security as being more risky than the 1-year Treasury security. If I bought the 20-year security, I would bear a considerable amount of interest rate risk. bear a considerable amount of interest rate risk....
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chapter7solution - Questions 7-4 The price of the bond will...

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