Short Answer Questions

1. Explain the relationship between a bonds yield to maturity and its price. (2 marks)

1. A 10 year bond has a yield to maturity of 4%. Which would result in the largest % change in the bonds price, if the YTM rises to 5% or falls to 3%? (2 marks)

1. Suppose a recently published report indicates inflation in both Canada and the U.S. is at an all time low and the Canadian dollar is strengthening. You hear a news report that the bond market has rallied (prices have increased). Which one of the following Canadian bonds would likely show the highest % price increase? (2 marks)
   1. Low coupon, short-term
   2. High coupon, long-term
   3. High coupon, short-term. Ans is High coupon, short-term.

Low coupon, long-term