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    Effects on a T-bond of decreasing market yields

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    A 10 year Corporate Bond is issued with a face value of $100,000.00, paying interest of $2,500.00 semi-annually. If market yields decrease shortly after the T-bond is issued, what happens to the bond's:
    A) Price
    B) Coupon Rate
    C) Yield to Maturity

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    a. price?
    As market yield decrease that means the discount rate used for discounting all future payments from bonds decrease. Hence the bond price will increase.

    Example, if the yields increase to 4%, Then the price of the bond will be
    =PV of coupon payments + PV of face value paid on maturity
    =2500/2%*(1-1/(1+2%)^20)+100000/(1+2%)^20 ...

    Solution Summary

    The solution discusses the effects on a T-bond when market yields decrease. In particular, it discusses how the price, coupon rate, and yield to maturity change.