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Homework answers / question archive / Suppose a recently published report indicates inflation in both Canada and the U
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) i. Low coupon, short-term ii. High coupon, long-term iii. High coupon, short-term iv. Low coupon, long-term
7. If interest rates are expected to fall, investors should buy [High/Low] coupon, (Long / Short] term bonds because they are more volatile and therefore have a greater % of [Income / Capital Gain / Capital Loss). 8. The difference between the cost of commercial paper and its maturity value is taxed as [Income / Capital Gain / Capital Loss), 9. Bond prices are less sensitive to a 1% change in yield when yields are initially [High/Low),
Answer : Correct option is High Coupon , Short term .
Reason :
When the bond prices are falling the bond with the high coupon and Short term will experience Lowest % change as when the duration of the bond is low the interest rate which is used as discounting rate to calculate the prices of the bond will be applied and the short term bond will involve less discounting and also when the coupon rate rates are high the effect is amallesr therefore High Coupon and short term Bond will experience Bod will experience lowest % decrease in Price.
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