21 May EXPLAIN WHAT HAPPENS TO THE MARKET PRICE OF A BOND AS THE BOND APPROACHES ITS MATURITY DATE.
GRADED DISCUSSION WEEK 4
Bond
Having determined how to calculate the value of a bond (Bond
Price) and the effective rate of return of bond (i) you should now be able to
derive or explain some key bond relationships
Bond Price = Coupon X 1 – 1/(1+i)N + Face Value X 1
i (1+i)
Using the above bond formula, your reading assignments and
basic logic, answer each of the following relationship questions in a brief one
paragraph posting
1. Logically explain in your own words the following bond
relationship and why it works: “The value of a bond is inversely related to
changes in the investor’s present required rate of return (the current interest
rate).”
2. Explain what bond market condition would result the
market price of a bond being less than par and what bond market condition would
result in the market price of a bond being greater than par.
3. Explain what happens to the market price of a bond as the
bond approaches its maturity date.
4. Logically explain in your own words the following bond
relationship, and why it work so: “Long term bonds have a greater interest rate
risk than do short term bonds.”
You are expected to make your own contribution in a main
topic as well as respond with value added comments to at least two of your
classmates as well as to your instructor.
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