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3. Relevance of Bond Price Movements Why is the relationship between interest rates and bond prices important to financial institutions

5. Exposure to Bond Price Movements How would a financial institution with a large bond portfolio be affected by falling interest rates? Would it be affected more than a financial institution with a greater concentration of bonds (and fewer short-term securities)? Explain

7. Coupon Rates If a bond’s coupon rate were above its required rate of return, would its price be above or below its par value? Explain

me?

9. Required Return on Bonds Why does the required rate of return for a particular bond change over time?

10. Inflation Effects Assume that inflation is expected to decline in the near future. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation? Explain

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Trinidad Tremblay
Trinidad TremblayLv2
30 Sep 2019

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Related questions

2. How Interest Rates Affect Bond Prices

Explain the impact of a decline in interest rates on:

a. An investor’s required rate of return.

b. The present value of existing bonds.

c. The prices of existing bonds.

3. Relevance of Bond Price Movements Why is the relationship between interest rates and bond prices important to financial institutions

5. Exposure to Bond Price Movements How would a financial institution with a large bond portfolio be affected by falling interest rates? Would it be affected more than a financial institution with a greater concentration of bonds (and fewer short-term securities)? Explain

7. Coupon Rates If a bond’s coupon rate were above its required rate of return, would its price be above or below its par value? Explain

me?

9. Required Return on Bonds Why does the required rate of return for a particular bond change over time?

10. Inflation Effects Assume that inflation is expected to decline in the near future. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation? Explain

1. Futures Contracts Describe the general charac- teristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts?

2. Futures Pricing How does the price of a financial futures contract change as the market price of the security it represents changes? Why?

3. Hedging with Futures Explain why some futures contracts may be more suitable than others for hedging exposure to interest rate risk.

4. Treasury Bond Futures Will speculators buy or sell Treasury bond futures contracts if they expect interest rates to increase? Explain

7. Hedging with Futures Assume a financial institution has more rate-sensitive assets than rate-sensitive liabilities. Would it be more likely to be adversely affected by an increase or a decrease in interest rates? Should it purchase or sell interest rate futures contracts in order to hedge its exposure?

8. Hedging with Futures Assume a financial institution has more rate-sensitive liabilities than rate- sensitive assets. Would it be more likely to be adversely affected by an increase or a decrease in interest rates.

Should it purchase or sell interest rate futures contracts in order to hedge its exposure?

9. Hedging Decision Why do some financial insti- tutions remain exposed to interest rate risk, even when they believe that the use of interest rate futures could reduce their exposure?

10. Long versus Short Hedge Explain the difference between a long hedge and a short hedge used by financial institutions. When is a long hedge more appropriate than a short hedge?

11. Impact of Futures Hedge Explain how the probability distribution of a financial institution’s returns is affected when it uses interest rate futures to hedge. What does this imply about its risk?

12. Cross-Hedging Describe the act of cross-hedging. What determines the effectiveness of a cross-hedge?

Bond valuation

An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 8% annual coupon. Bond L matures in 19 years, while Bond S matures in 1 year.

Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L.

What will the value of the Bond L be if the going interest rate is 5%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent.
$

What will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent.
$

What will the value of the Bond L be if the going interest rate is 14%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 14%? Round your answer to the nearest cent.
$

Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?

The change in price due to a change in the required rate of return decreases as a bond's maturity increases.

Long-term bonds have lower interest rate risk then do short-term bonds.

Long-term bonds have lower reinvestment rate risk then do short-term bonds.

The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

Long-term bonds have greater interest rate risk then do short-term bonds.

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