Question

A security will make payments of $25 per month for the next 5 years, plus $1000 at maturity. Which of the following is true? Group of answer choices If the price increases from $1,500 to $1,600 then the period rate will be more than the nominal rate If the price increases from $1,500 to $1,600 then the yield to maturity will increase. If the price increases from $1,500 to $1,600 then the effective rate will increase If the price increases from $1,500 to $1,600 then the yield to maturity will decrease.

Answer 1

Answer: If the price increases from $1,500 to $1,600 then the yield to maturity will decrease.

Explanation:

If Yields in the market fell, Bonds would still be making the same coupon payments they always have been regardless of this fall. This will lead investors to buy more bonds which will have the effect of raising bond prices.

This therefore shows that Bond prices and Yields are inversely related. If one rises, the other falls. If the price of the security (bond) increases from $1,500 to $1,600 then it follows that the yield to maturity will decrease.