Purchase Solution

Relationship between bond prices and bond yields

Not what you're looking for?

Ask Custom Question

With interest rates at historic lows, you decide to invest in high yield corporate bonds. Fly-By-Night Inc., has a new 30 year bond issue that seems attractive. Each bond costs $100 and has a fixed coupon of $10, a yield of 10%. With $1000 in your pocket, you decide to buy 10 of these bonds.

You buy them at original issue and the very next day the yield goes to 20%. What does that mean to your income and to your investment? What does that tell you about the relationship between bond prices and bond yields?

Purchase this Solution
Solution Summary

Your tutorial shows you four different scenarios in Excel (click in cells to see computations) to show you how price changes the yield. A paragraph explains why this works the way it does. Suitable for a novice.

Solution Preview

See the attached file.

Your tutorial shows you four different scenarios in Excel (click in cells to see computations) to show you how price changes the yield. A paragraph explains why this works the way it does. Suitable for a novice.

With interest rates at historic lows, you decide to invest in high yield corporate bonds. ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
Recent Feedback
  • "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
  • "Thank, this is more clear to me now."
  • "Awesome job! "
  • "ty"
  • "Great Analysis, thank you so much"
Purchase this Solution
Free BrainMass Quizzes
Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

Basics of corporate finance

These questions will test you on your knowledge of finance.

View More Free Quizzes
Related BrainMass Solutions

  • The Relationship between Bond Price and Yield

    "The most important bond pricing relationship to understand is the inverse relationship between bond prices and interest rates (or bond yields)—as interest rates rise, bond prices fall and as interest rates fall, bond prices rise.

  • Bond valuations based on Yields

    What do you conclude about the relationship between time to maturity and the sensitivity of bond prices to interest rates?

  • What is the bond's price if comparable debt yields 12%? What is the current yields and yields to maturity?

    In other words, Explain the relationship in the above example between interest rates (at 12% vs 8%) and the price of the bond. We find a negative relationship between interest rates and the price of the bond.

  • Yield to maturity and Bond Price

    This is because there is a negative relationship betweeen thr Bond prices and interest rates. This discusses the relationship between Yield to maturity and Bond Price

  • Bond price and yield calculations

    This calculation can be proven by the bond price of $938.81 x 15.98% = $150. The solution explains how to mathematically calculate bond yields and provides information about the relationship between bond prices, bond yields and the coupon rate.

  • Analyzing a Bond Portfolio

    Explain the relationship between the level of horizon return and the two yields.(Using these two yields to explain why the bond made or lost money more than expected.) 6.

  • Trading Pairs and Principle Component Analysis

    In the current example, the bond yields for the government treasury bond of 2, 5, 7, 10 and 30 years maturity are provided.

  • Risk-Free Zero Coupon Bond

    According to the relationship between the swap rate and par yields, the swap rates are generally derived from LIBOR par yields. 7.

  • Relationship between interest rate and maturity

    183962 Relationship between interest rate and maturity What's a simple way to assess and compare the default risk of publicly traded bonds? Describe how a bond's interest rate risk is related to its maturity.

View More Related Solutions