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Is the issue price of bonds equal to the present value of the principal plus the present value of the interest?
The price of bonds are not equal to the present value and principal upon purchase. The interest is accrued over a certain time period, then collected.
Explain why an expectation of Central Bank official rate hikes would cause bond price to fall?
The price of bonds is inversely related to interest rates. If interest rates rise, the value of existing bonds will decline since the coupon rate available on newly issued debt will be higher due to the increase in interest rates. The price of existing bonds will drop in price until the bond provides a yield similar to comparable newly issued debt.
What does the effect of rate of interest on bonds?
it will increase the price of bonds
How are bond prices affected when the Federal Reserve lowers the interest rate?
When the Federal Reserve lowers interest rates, the value of outstanding bonds will increase. The increase in the value of bonds is due to the market price of the bonds adjusting to reflect the lower interest rates available on new bonds. Investors with bond holdings enjoy an increase in the value of their holdings when the Fed cuts rates. However, new investors in bonds will receive a lower rate of interest and if the Fed later raises rates, bond investors will experience a decrease in the market value of their bonds.
Is the price at which bonds sell determined by the interaction of stated rates of interest and market rates of interest?
Yes, the price at which bonds sell are determined by the interaction of stated rates of interest and market rates of interest.
Can bonds increase in value?
Yes, bonds can increase in value, primarily due to changes in interest rates. When interest rates fall, existing bonds with higher interest rates become more attractive to investors, leading to an increase in their market price. Additionally, improvements in the creditworthiness of the issuer can also boost a bond's value. However, bond prices can also decrease if interest rates rise or if the issuer's credit quality declines.
What's the difference between normal bonds and premium bonds?
Normal bonds are issued at face value and pay regular interest payments. Premium bonds are issued at a higher price than face value and do not pay interest; instead, investors are entered into a lottery for the chance to win cash prizes.
What factor will cause a bond price to increase in value?
A bond's price will increase in value primarily when interest rates decline. As rates fall, the fixed interest payments of existing bonds become more attractive compared to new bonds issued at lower rates, leading to higher demand and thus an increase in price. Additionally, improvements in the issuer's creditworthiness or a decrease in perceived risk can also drive up a bond's price.
Why is a change in required yield for preferred stock likely to have a great impact on price than a change in required yield for bonds?
Bonds have a maturity date while most preferred stocks are perpetual, which means they never mature. No matter the change in interest rates before maturity, bonds will eventually be worth par or 100 when they mature. So interest rate changes may affect the price in the near term but the investor will know what s/he will get at maturity. Since preferred stocks never mature, there is no value in the future that anchors the price of the bond. Therefore, if interest rates go up, the value of the preferred may be permanently impacted by a better interest rate than the stated dividend yield. Thus, the price of the preferred stock will be volatile than that of a bond.
Which bond pay no interest until maturity?
Bonds that pay no interest until maturity are known as zero-coupon bonds. Instead of periodic interest payments, they are sold at a discount to their face value, and the investor receives the full face value at maturity. The difference between the purchase price and the maturity value represents the investor's earnings. These bonds are often used for long-term savings and can be appealing for investors looking for a predictable return at a specific future date.
What are series ee bonds worth?
Series EE bonds are U.S. government savings bonds that are sold at face value and earn interest over time. The interest rate is fixed and is typically compounded semiannually. After 20 years, they reach maturity and can be redeemed for their full face value, which may be significantly higher than the initial purchase price, depending on the interest accrued. Additionally, they can earn interest for up to 30 years before they must be cashed in.
Will the total amount of interest expense reported over the life of the bonds be the same regardless of whether the bonds are issued at par premium or discount?
No, the total amount of interest expense reported over the life of the bonds will not be the same if the bonds are issued at par, premium, or discount. When bonds are issued at a premium, the effective interest expense is lower than the nominal interest payments, whereas, for bonds issued at a discount, the effective interest expense is higher than the nominal payments. Thus, the total interest expense recognized will differ based on the issuance price relative to par value.
