G11 Price as a Functin of Yield

Question 1

what is the eqn for price sensitivity using price as functions of yield or interest

Answer 1

%ΔP = (P_i_1 - P_i_0)/P_i_0

Question 2

T or F: when interest rates decrease, bond prices go down.

Answer 2

False. Price and interest rates are inversely related. So a decrease in interest rates causes bond prices to go up.

Question 3

Which of the following bonds is the most price sensitive to changes in interest rates?
a. 5-year zero coupon bond
b. 10-year zero coupon bond
c. 20-year zero coupon bond
d. The are equally sensitive.

Answer 3

Cash flows further into the future are more sensitive to changes
in the yield curve, thus the 20-year bond is the most sensitive.

Question 4

Let x be the price change for a 20-year zero coupon bond when
interest rates change from 5% to 4%. Let y be the price change
for the same bond when interest rates change from 15% to 14%.

True or false: the absolute value of x > absolute value of y.

Answer 4

True. The lower the yield rate the more sensitive cash flows will be to changes in the yield rate.