Consider a $1,000 bond with a fixed-rate 10 percent annual coupon rate and a maturity (N)...

 

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Consider a $1,000 bond with a fixed-rate 10 percent annual coupon rate and a maturity (N) of 10 years. The bond currently is trading at a yield to maturity (YTM) of 10 percent. a. Complete the following table: Change N Coupon Rate YTM Price $ change in % change in price from price from par par 8 10% 9% 9 10 9 10 10 9 10 10 10 1,064.18 1,000 64.18 6.418% 10 10 11 941.11 -58.59 -5.889% 11 10 11 12 10 11 b. Use this information to verify the principles of interest rate-price relationships for fixed-rate financial assets. Rule 1. Interest rates and prices of fixed-rate financial assets move inversely Rule 2. The longer is the maturity of a fixed-income financial asset, the greater is the change in price for a given change in interest rates Rule 3. For a given percentage (+/-) change in interest rates, the increase in price for a decrease in rates is greater than the decrease in value for an increase in rates. Consider a $1,000 bond with a fixed-rate 10 percent annual coupon rate and a maturity (N) of 10 years. The bond currently is trading at a yield to maturity (YTM) of 10 percent. a. Complete the following table: Change N Coupon Rate YTM Price $ change in % change in price from price from par par 8 10% 9% 9 10 9 10 10 9 10 10 10 1,064.18 1,000 64.18 6.418% 10 10 11 941.11 -58.59 -5.889% 11 10 11 12 10 11 b. Use this information to verify the principles of interest rate-price relationships for fixed-rate financial assets. Rule 1. Interest rates and prices of fixed-rate financial assets move inversely Rule 2. The longer is the maturity of a fixed-income financial asset, the greater is the change in price for a given change in interest rates Rule 3. For a given percentage (+/-) change in interest rates, the increase in price for a decrease in rates is greater than the decrease in value for an increase in rates.