BONDS AND THEIR VALUATION (I need help explaining the following and/or demonstra

Question

BONDS AND THEIR VALUATION

(I need help explaining the following and/or demonstrating it for my upcoming exam if anyone could help me comprehend the concepts I would greatly appreciate it!!)

Interpret and apply all bond terminology (i.e. par, maturity, coupon, price, yield, etc.)..

Explain the relationship between a bond’s price and its maturity..

Explain the relationship between a bond’s price and its yield..

Explain the relationship between prevailing interest rates and bond yields..

Explain and interpret bond credit ratings..

Explain the different types of bonds (i.e. treasuries, municipal bonds, CDO’s, indexed bonds, etc.)..

Calculate the tax equivalent yield for a municipal bond..

Interpret and explain bond spreads (price or yield) and how they change..

Explanation / Answer

Explain the relationship between a bond’s price and its maturity..

Answer:The longer the maturity of your bond investments, the greater the price volatility.

Explain the relationship between a bond’s price and its yield

Answer: A bond's market price depends on its yield to maturity (YTM). When a bond has a YTM greater than its coupon rate, it sells at a discount from its face value. When the YTM is equal to the coupon rate, the market price equals the face value. When the YTM is less than the coupon rate, the bond sells at a premium over face value.

The bond price is the present value when discounting the future cash flows from a bond; YTM is the interest rate used in discounting the future cash flows (coupon payments and principal) back to their present values.

Explain the relationship between prevailing interest rates and bond yields..

Answer:When a bond has a YTM greater than its coupon rate, it sells at a discount from its face value. When the YTM is equal to the coupon rate, the market price equals the face value. When the YTM is less than the coupon rate, the bond sells at a premium over face value.

Explain and interpret bond credit ratings..

Answer:Bond credit ratings are without a doubt the most important measures in the bond market. Three major ratings agencies – Moody’s, Standard and Poor’s, and Fitch drive the bond market with their research into bond quality.

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