Relationships for fixed-rate financial assets

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Reference no: EM131861283

Consider a $1,000 bond with a fixed-rate 10 percent annual coupon (Cpn %) and a maturity (N) of 10 years. The bond currently is trading to a market yield to maturity (YTM) of 10 percent. Complete the following table.

From Par, $ From Par, %

N Cpn % YTM Price Change in Price Change in Price

10 10% 9% 1,065.04 65.04 6.504%

10 10% 10% $ 1,000.00 0 0

10 10% 11%

Use the information to verify the three principles of interest rate-price relationships for fixed-rate financial assets.

Rule One: Interest rates and prices of fixed-rate financial assets move inversely.

Consider a $1,000 bond with a fixed-rate 10 percent annual coupon (Cpn %) and a maturity (N) of 30 years. The bond currently is trading to a market yield to maturity (YTM) of 10 percent. Complete the following table.

From Par, $ From Par, %

N Cpn % YTM Price Change in Price Change in Price

30 10% 9%

30 10% 10%

30 10% 11%

Use the information to verify the three principles of interest rate-price relationships for fixed-rate financial assets.

Rule Two: 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 Three: The change in value of longer-term fixed-rate financial assets increases at a decreasing rate.

Reference no: EM131861283

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