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Relationship between bond prices and bond yields

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?

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 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.

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