Interest Rates And Bond Prices Flashcards
ABC has a bond with a duration of 10. XYZ has a similar bond with a duration of 8. Which of the following are true?
I. If interest rates fall by 1%, ABC’s bond price will decrease by about 10%.
II. If interest rates rise by 1%, XYZ’s bond price will decrease by about 8%.
III. XYZ’s bond is more sensitive to interest rate changes than ABC’s bond.
IV. ABC’s bond is more sensitive to interest rate changes than XYZ’s bond.
2 and 4
This is because duration is a measure of bond prices sensitivity to the interest rates
What is interest-rate or market risk?
As interest rates rise people can invest their money and you were bonds which are issued with the higher interest rates also the prices of the bonds are already in the secondary market decrease this is called market or interest rate risk
Why is mortgage rates greater for long-term bonds and less for short term bonds?
The probability of interest rate increasing is much more for a long term bond.
What can people do to save guard them against the increase in interest rates of the bond?
Bond investors could sell long-term bonds and invest in short term bonds because when the interest rates increase the prices of the long-term bonds fall faster than the short term bonds.
Are the prices of long-term bonds more sensitive to interest rate increases? If yes why
Yes the price of long-term bonds are more sensitive to interest rate increases Because the price probability of increase in interest rate is higher over a longer period than a short term.
Why do short term bonds pay lower yields than similarly rated long-term bonds?
search on bonds have greater liquidity and lower risk as people can easily liquidate these bonds and purchase new ones and their money is not tied up for long.
What is duration Of the bond?
Duration is a measure of the sensitivity of the bond to the changes in interest-rate. If the duration is five that means that with every 1% increase in the interest rate of the in the market price of the bond will fall by 5%
Why do bonds with lower coupon rates have higher durations and vice versa?
Bonds with Laura coupon rate pay majority of the money that the principal at the end of the life of the bot that’s why they have higher durations.
Which bond has the highest duration?
Zero coupon bond
