3. Relevance of Bond Price Movements Why is the relationship between interest ra

Question

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

Explanation / Answer

3. interest rates and bond prices will move in the same directions. if the interest rates are high then the returns on the bonds will be high to the financial instituitions and vice vers. so, financial institutions looks for higher returns on bonds at lesser risk.

5. yes, it will be affected than the concentrated one. the institution which invested huge amounts in bonds portfolio will suffer much with falling the interest rates.

7. when the rquired rate of return is greater than the coupon rate the value of the bond is less than its par value

9. the required rate of return on a bond is depends on many factors. if the normal interest rates increase in markets, then the required rate of return also increases and vice versa. and based on the inflation rates also the returns will be vary.

10. if inflation is going to be decline, then it is better to invest in bonds in long term.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.