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arsen [322]
3 years ago
9

A(n) bond is a long-term contract under which a borrower agrees to make payments of interest and principal, on specific dates, t

o the holder of bond. There are four main types reflecting who the issuers are: ?-Select-1.Business2.Treasury?corporate, municipal, and foreign. Each type differs with respect to degree of risk and expected return. All have some common characteristics even though they may have different contractual features.
2. The par value of a bond is its stated face value or maturity value, and its coupon interest rate is the stated annual interest rate on the bond. The maturity date is the date on which the par value must be repaid. A call provision gives the issuing corporation the right to redeem the bonds under specified terms prior to their normal maturity date, although not all bonds have this provision. Some bonds have sinking fund call provisions which require the corporation to systematically retire a portion of the bond issue each year. Because sinking fund provisions facilitate their orderly retirement, bonds with these provisions are regarded as being safer so they will have (-Select-1.lower2.equivalent )coupon rates than otherwise similar bonds without these provisions.

3. Longer maturity bonds have high-interest rate risk but low reinvestment rate risk, while higher coupon bonds have a higher level of (-Select-1.reinvestment rate 2.exchange rate)risk and a lower level of (-Select-1.interest rate2.exchange rate) risk. To account for the effects related to both a bond's maturity and coupon, many analysts focus on a measure called duration which is the bond's sensitivity to interest rates.
Business
2 answers:
Brums [2.3K]3 years ago
8 0

Answer:

1) Bond

Treasury

Risk

2) Par

Call

Sinking fund

Safer

Lower

Explanation:

Vesna [10]3 years ago
3 0

Answer:

1) treasury, corporate, municpal 2) equivalent 3) reinvestment rate, interest rate

Explanation:

1) there are four main types of bonds: treasury, corporate, municpal and zero-coupon. Foreign bonds my fall into any of these category.

2) Sinking fund provisions require a bond issuer to put aside some money regularly to be paid to bond holder at bond maturity. The insurance provided by sinking funds allows for lower interest rates. Interest expenses reduce. This deosn't mean coupon rate of bonds will change.

3) higher coupon bonds have higher reinvestment risk because a high amount has to be reinvested to get required yeild-to-maturity. They have lower level of interest rate risk. This is because if the market interest rate rises, their coupon rate will not fall as much as that of lower coupon bond

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C. The importance of secondary effects

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Secondary economic impact is a study of economic activities due to recurring rounds of spending by companies, households, and the government.

Secondary effects are long term and comes after the primary effect (first round of spending).

It is also called induced economic effect.

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Bond j has a coupon rate of 5 percent and bond k has a coupon rate of 11 percent. both bonds have 13 years to maturity, make sem
aleksley [76]

To find the change in the price of the bonds, first need to find the price of individual Bond.

Bond Price is directly related to the change in the YTM of the bond. If the YTM rises by 2%, the price of the bond will fall.

Bond J :

(WHEN YTM IS 8%)

Coupon Rate: 5%

Coupon Amount (PMT): $1,000 * 5% = $50/2 = $25 (Semi annual coupon amounts)

Number of years (NPER) = 13*2 = 26

YTM (rate) = 8%/2 = 4%

Face Value: $1000

Price (PV0) : ?

To find the price of the bond, can either use excel or with formula.

When input the below formula in excel,

PV =pv(rate,nper,pmt,fv,type)

P0 =pv(4%,26,-25,-1000)

When input the formula in excel, we get PV as $760.26

(WHEN YTM RISES BY 2%, NEW YTM IS 10%)

Coupon Amount (PMT): $25 (Semi annual coupon amounts)

Number of years (NPER) = 26

YTM (rate) = 10%/2 = 5%

Face Value: $1000

Price (PV1) : ?

To find the price of the bond, can either use excel or with formula.

When input the below formula in excel,

PV =pv(rate,nper,pmt,fv,type)

P1 =pv(5%,26,-25,-1000)

When input the formula in excel, we get PV as $640.62

CHANGE IN THE BOND PRICE OF BOND J DUE TO THE CHANGE IN THE YTM

%change = (P1 – P0)/P0

%change = ($640.62 - $760.26)/$760.26

%change = -18.68%

Therefore, with the increase in 2% YTM of BOND J, the price falls by 18.68%

Bond K :

(WHEN YTM IS 8%)

Coupon Rate: 11%

Coupon Amount (PMT): $1,000 * 11% = $110/2 = $55 (Semi annual coupon amounts)

Number of years (NPER) = 13*2 = 26

YTM (rate) = 8%/2 = 4%

Face Value: $1000

Price (PV0) : ?

To find the price of the bond, can either use excel or with formula.

When input the below formula in excel,

PV =pv(rate,nper,pmt,fv,type)

P0 =pv(4%,26,-55,-1000)

When input the formula in excel, we get PV as $1,239.74

(WHEN YTM RISES BY 2%, NEW YTM IS 10%)

Coupon Amount (PMT): $55 (Semi annual coupon amounts)

Number of years (NPER) = 26

YTM (rate) = 10%/2 = 5%

Face Value: $1000

Price (PV1) : ?

To find the price of the bond, can either use excel or with formula.

When input the below formula in excel,

PV =pv(rate,nper,pmt,fv,type)

P1 =pv(5%,26,-55,-1000)

When input the formula in excel, we get PV as $1,071.88

CHANGE IN THE BOND PRICE OF BOND K DUE TO THE CHANGE IN THE YTM

%change = (P1 – P0)/P0

%change = ($1071.88 - $1239.74)/$1239.74

%change = -13.54%

Therefore, with the increase in 2% YTM of BOND k, the price falls by 13.54%

SIMILALRY IF THE BOND PRICES FALLS BY 2%, the YTM WILL BE 6%/2 = 3% **(REFER THE IMAGE ATTACHED)

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