0
Want this question answered?
Be notified when an answer is posted
Add your answer:
Earn +20 pts
Are short-term bond prices are more sensitive to interest rate changes than are long-term bond prices?
No, longer term bonds are more sensitive to interest rate changes.
Are interest rates on long term bonds usually lower or higher than interest rates on short term bonds?
Higher
If there is a decline in interest rates which would you rather be holding long term bonds or short term bonds?
God
What is the relationship between interest rates and bond prices?
There is an inverse relationship between price and yield: when interest rates are rising, bond prices are falling, and vice versa. The easiest way to understand this is to think logically about an investment. You buy a bond for $100 that pays a certain interest rate (coupon). Interest rates (coupons) go up. That same bond, to pay then-current rates, would have to cost less: maybe you would pay $90 the same bonds if rates go up. Ignoring discount factors, here is a simplified example, a 1-year bond. Let's say you bought a 1-year bond when the 1-year interest rate was 4.00%. The bond's principal (amount you pay, and will receive back at maturity) is $100. The coupon (interest) you will receive is 4.00% * $100 = $4.00. Today: You Pay $100.00 Year 1: You receive $4.00 Year 1 (Maturity): You Receive $100 Interest Rate = $4.00 / $100.00 = 4.00% Now, today, assume the 1-year interest rate is 4.25%. Would you still pay $100 for a bond that pays 4.00%? No. You could buy a new 1-year bond for $100 and get 4.25%. So, to pay 4.25% on a bond that was originally issued with a 4.00% coupon, you would need to pay less. How much less? Today: You Pay X Year 1: You Receive $4.00 Year 1 (Maturity): You Receive $100 The interest you receive + the difference between the redemption price ($100) and the initial price paid (X) should give you 4.25%: [ ($100 - X) + $4.00 ] / X = 4.25% $104 - X = 4.25% * X $104 = 4.25% * X + X $104 = X (4.25% + 1) $104 / (1.0425) = X X = $99.76 So, to get a 4.25% yield, you would pay $99.75 for a bond with a 4.00% coupon. In addition to the fact that bond prices and yields are inversely related, there are also several other bond pricing relationships: * An increase in bond's yield to maturity results in a smaller price decline than the price gain associated with a decrease of equal magnitude in yield. This phenomenon is called convexity. * Prices of long term bonds tend to be more sensitive to interest rate changes than prices of short term bonds. * For coupon bonds, as maturity increases, the sensitivity of bond prices to changes in yields increases at a decreasing rate. * Interest rate risk is inversely related to the bond's coupon rate. (Prices of high coupon bonds are less sensitive to changes in interest rates than prices of low coupon bonds. Zero coupon bonds are the most sensitive.) * The sensitivity of a bond's price to a change in yield is inversely related to the yield at maturity at which the bond is now selling.
What is the premium that reflects the risk associated with changes in interest rates for l long-term security?
Maturity Risk Premium (MPR)
Are short-term bond prices are more sensitive to interest rate changes than are long-term bond prices?
No, longer term bonds are more sensitive to interest rate changes.
Which bond respond more to interest rate changes short or long term bond?
Typically, long term bonds are more price sensitive than short term bonds.
Are long term bond prices more sensitive to changes in interest rates than are short term bond prices?
yes
Are interest rates on long term bonds usually lower or higher than interest rates on short term bonds?
Higher
If there is a decline in interest rates which would you rather be holding long term bonds or short term bonds?
God
What are the benefits of Callable Bonds?
The benefits of callable bonds is that they are protected in the fact if interest rates drop, which is especially important if one purchases bonds for a long term period.
How savings bonds work?
Savings bonds are an investment that will grant you interest based on how long you have the bond. The interest is comprised of either an annual or semiannual basis and will give you a larger sum over a longer period of time.
Do long term municipal bonds face interest rate risk?
If they pay a fixed coupon, then yes.
Where can I learn how to get started investing savings bonds?
You can make an appointment to speak to someone at your bank about their current interest rates and how long the terms are for the savings bonds they offer, and even find out the interest rates from several banks so you will get the best rate.
What distinguishes stocks from bonds?
The only difference between the 2 is that a stock represents ownership and a bond is a long term debt. You will be paid via stocks but only receive interest from bonds.
How long does it take for bonds to reach full maturity?
Different bonds have different maturity dates. Additionally, there are different type of bonds, some provide interest based on the face value, and some provide the face value upon maturity.
How do interest rates affect investment?
When interest rates are high, investors will consider investing in short term investments, instead of long term investments. When interest rates are low, investors will consider investing in bonds because they are safer.
