Using bond supply and demand analysis, predict how each of the following events

Question

Using bond supply and demand analysis, predict how each of the following

events would affect the yield to maturity on bonds.

A.An increase in the default risk on bonds.

B.A decline in brokerage commissions on stocks.

C.A decrease in the expected rate of inflation

Bond Rates of Return

A.What is the yield to maturity on a $1,000 facevalue discount bond maturing in two years that sells for $800 today?

B.What is the annual rate of return on a bond with an annual coupon rate of 10 percent, a face value of $100,000, and its price rises from $80,000 to $90,000 over the year? Show and explain.

C.What is the current yield on a perpetuity that makes annual payments of $300 and has a current price of $2,500?

Explanation / Answer

Effect on Bond Yield to Maturity: A. increase in Yield B. No effect on Bond Yield C No effect on Bond Yield Effect on Bond Rate of Return A Face Value 1000 Current Price 800 A Now 800 x (1+r)^2 = 1000 Therefore, (1+r)^2=1000/800 = 1.25 Or, 1+r = Square root(1.25)=1.118034 hence r = 0.118034 or 11.80% B Annual Interest @ 10% on $100,000 = $10,000. Sale Price Capital Gain Annual Interest Total Income Retun 80000 20000 10000 30000 37.50% 90000 10000 10000 20000 22.22% Return will range from 37.50% to 22.22%. Annual interest = 100,000 x 10% = 10000 C Current Price 2500 Annual Payment 300 Current yield = 300/2500 = 12%

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

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