The meaning of Interest Rates - Dynamic Behavior of Bond Prices
9 important questions on The meaning of Interest Rates - Dynamic Behavior of Bond Prices
What happens when a bod trades at discount?
What happens when a coupon bond trades at premium?
What will coupon bonds mostly initially trade at?
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– Suppose that Proctor & Gamble issued a bond
that has seven years remaining until maturity, a
$1000 face value, and a 4% coupon rate with
annual coupon payments.
– If the current market interest rate is 3%, what is bond’s premium or discount?
– What if the current market rate is 6%?
The price of the bond will be 888.35 at market rate 6% so the discount is $111.65
Toward what kind of value ill the price of discount or premium bond move over time?
What happens to the IRR when the bond's yield to maturity has not changed?
Explain the inverse relationship between interest rates and bond prices
prices fall.
– As interest rates and bond yields fall, bond
prices rise.
The University of Pennsylvania sold $300 million
of 100-year bonds with a yield to maturity of
4.67%. Assuming the bonds were sold at par
and pay an annual coupon, by what percentage
will the price of the bond change if its yield to
maturity decreases by 1%? Increases by 2%?
b) price increases by 29.9%
see slide 126/7
What must the price of a coupon bond equal to? + formula
face value.
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