Interest, Coupons & Bond Rates
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Construct some simple examples to illustrate your answers to the following:
a. If interest rates rise, bond prices rise or fall?
b. If the bond yield is greater than the coupon, is the price of the bond greater or less than 100?
c. If the price of a bond exceeds 100, is the yield greater or less than the coupon?
d. Do high-coupon bonds sell at higher or lower prices than low-coupon bonds?
e. If interest rates change, does the price of high-coupon bonds change proportionately more than that of low-coupon bonds?
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Solution Summary
This response provides examples for defining the relationship between interest rates and bond prices, bond yield and coupon value, high-a and low-coupon bonds, including calculations and explanations for each type of problem and step-by-step processes for solution.
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A. If a bond has an interest rate of 10% with one year of maturity the bond would be worth 110.00 (100.00 x 110%). The formula would be:
PV = FV
(1+r)
= 110
(1+0.1)
=100
If the interest rate was increased to 20%, the formula would be:
PV = 110
= (1+0.20)
...
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