Consider a $1,000 bond with a fixed-rate 10 percent annual coupon rate and a maturity (N) of 10 years. The bond currently is trading at a yield to maturity

(YTM) of 10 percent.

a. Complete the following table:

b. Use this information to verify the principles of interest rate–price relationships for fixed-rate financial assets.
Rule 1.

Interest rates and prices of fixed-rate financial assets move inversely.

Rule 2.

The longer is the maturity of a fixed-income financial asset, the greater is the change in price for a given change in interest rates.

Rule 3.

The change in value of longer-term fixed-rate financial assets increases at a decreasing rate.

Rule 4.

Although not mentioned in Appendix 9A, for a given percentage (±)

change in interest rates, the increase in price for a decrease in rates is greater than the decrease in value for an increase in rates.

The following questions and problems are based on material in Appendix 9B located at the book’s website (www.mhhe.com/saunders11e).

Transcribed Image Text:

Change Coupon N Rate YTM Price 68 10% 9% 9 10 9 10 10 9 10 10 10 10 10 11 11 10 11 12 10 11 $ Change in Price from Par % Change in Price from Par