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# Bond prices

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1. Do normal demand/supply fluctuations move bond prices?
2. Or is it based on changes in the required yield (which is factored into the bond calculation, thus changing the prices)

If it's based on 1. then to changes in required yield force people to buy and sell?
What market forces change the required yield? Is this based on the yield curve?

https://brainmass.com/economics/bonds/bond-prices-143143

#### Solution Preview

You are right on both parts. First of all the price of any item (including bonds and other debt securities) is based on the law of demand and supply. But this is a a very high level explanation of the bond prices. Of course the higher the demand, greater the bond prices and lower the demand, less are the bond prices. A similar logic can be deduced for the supply of bonds. ...

#### Solution Summary

The solution answers the question below in great detail.

\$2.19

## Compute the duration for bond C, and rank the bonds on the basis of their price volatility. what is the price of each of the following bonds (\$1,000 principal), if the current interest rate is 9%? Rank the bonds in terms of price fluctuations with the least volatile bond first and the most volatile bonds last as judged by each bond's duration

1. Compute the duration for bond C, and rank the bonds on the basis of their price volatility. The current rate of interest is 8%, so the prices of bonds A and B are \$1,000 and \$1,268, respectively
.
BOND COUPON TERM DURATION
A 8% 10 YRS 7.25
B 12% 10 YRS 6.74
C 8% 5YRS ?

Confirm your ranking by calculating the percentage change in the price of each bond when interest rates is rises from 8 to 12%. (Bond A's and B's prices become \$774 and \$1000, respectively?

2.a) what is the price of each of the following bonds (\$1,000 principal), if the current interest rate is 9%?

Firm A Coupon 6%
Maturity 5%

Firm B Coupon 6%
Maturity 20 yrs

Firm C Coupon 15%
Maturity 5 yrs

Firm D Coupon 15%
Maturity 20 yrs

Firm E Coupon 0% (zero coupon bond)
Maturity 5%

Firm F Coupon 0% (zero coupon bond)
Maturity 20%

b) What is the duration of each bond?

c) Rank the bonds in terms of price fluctuations with the least volatile bond first and the most volatile bonds last as judged by each bond's duration

d) Confirm your volatility rankings by determining the percentage change in the price of each bond if interest rates rise to 12%.

e) What generalizations can be made from the above exercise concerning (a) low-versus high-coupon bonds (b) intermediate-versus long-term bonds, and (c) zero coupon bonds?

3). A 10 year bond with a 9% coupon will sell for \$1,000 when interest rates are 9%. What is the duration of this bond? Using duration to forecast the change in the price of the bond, calculate the difference between the forecasted and the actual price change according to the bond valuation model for the following interest rates: 9.2, 9.4, 9.6, 9.8, 10.0, 10.5, 11.0 and 12.0 %

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