Ch. 3 Corporation Finance

Which comes first in the market for U.S. treasury bonds. Bond prices or yields to maturity?

Bond Prices. The bond price is determined by the bond's cash flows and the spot rates of interest. Once you know the bond price and the bond's cash flows, it is possible to calculate the yield to maturity.

If a bond's coupon rate is lower than its ytm, then the bond's price will increase over its remaining maturity.

Conversely, if the yield is greater than the coupon, the price will be below face value and it will rise over the remaining life of the bond.

If market yields increase shortly after a T-bond is issued what happens to the bond's coupon rate?

Does not change. The coupon rate is set at time of issuance.

If interest rates rise, bond durations rise also.

False. A higher interest rate reduces the relative present value of (distant) principal repayments.

Longer-maturity bonds necessarily have longer durations. True or False.

False. Duration depends on the coupon as well as the maturity.

The longer a bond's duration, the lower its volatility. True or False.

False. Given the yield to maturity, volatility is proportional to duration.

If a bond's coupon rate is higher than its ytm, then the bond will sell for more than face value.

If the coupon rate is higher than the yield, then investors must be expecting a decline in the capital value of the bond over its remaining life. Thus, the bond's price must be greater than its face value.

If market yields increase shortly after a T-bond is issued what happens to the bond's price?

Price falls. Market yields and prices are inversely related.

Which comes first in the market for U.S. treasury bonds. Spot interest rates or Yields to maturity?

Spot interest rates. Yield to maturity is a complicated average of the separate spot rates of interest.

Other things equal, the lower the bond coupon,, the higher its volatility. True or False.

True. A lower coupon rate means longer duration and therefore higher volatility.

If market yields increase shortly after a T-bond is issued what happens to the bond's ytm?

Yield rises. Market yields and prices are inversely related.