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1)8 year bond has a yield to maturity of 6%
1)8 year bond has a yield to maturity of 6%. Which would result in the smallest % change in the bond's price, a rise to 7% or a fall to 5%? Why? (2 marks) Ans:
2)Suppose a recently published report indicates inflation in both Canada and the U.S. is becoming excessive and the Canadian dollar is weakening. You hear a news report that the bond prices are falling. Which of the following Canadian bonds would experience the lowest % price decrease? Why? (4 marks) 1. Low coupon, short-term ii. High coupon, long-term iii. High coupon, short-term iv. Low coupon, long-term
Expert Solution
Answer :2) When the rate rises to 7% the i will result in smalles % chane , Because coupons are discounted using market rate of interest,Because when the market rate is more than yield to maturity then it will result in smallest % change.Therefore if all things remaining constant i.e Years to maturity (i.e 8 years) ,Yield to maturity 6% , when market rises it will exhibit samaller % change.
Note ; as per Chegg policy , only first question is required to solve .Please Post other questions separately.
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