Question 3 (30 marks)

(a)Define interest rate risk on bond prices. (2 marks)

(b)Anson is studying the interest rate risk of two bonds that he is holding. Bond A is with longer term to maturity than Bond B, all else being equal. Which bond is with a higher interest rate risk? Please explain. (4 marks)

(c)Anson is also studying the interest rate risk of two other bonds that he is holding. Bond C is with a higher coupon rate than Bond D, all else being equal. Which bond is with a higher interest rate risk? Please explain. (4 marks)

PQR Bond is a bond making semiannual payments. The bond pays a coupon rate of 8%, has a yield to maturity (YTM) of 6%, and with 15 years to maturity.

(d)Calculate the price of PQR Bond today. (5 marks)

(e)Assuming that interest rates remain unchanged, evaluate the expected prices of PQR Bond in 10 years and in 13 years. (10 marks)

(f)Describe the changes in PQR's bond prices with the years to maturity. (5 marks)

Answer rating: 100% (QA)

a Interest rate risk on bond prices refers to the potential impact of changes in interest rates on the value of a bond As interest rates change the present value of future cash flows from a bond can f... View the full answer