A 10 year bond with annual coupons has face value 500 units and coupon rate of two
Question:
A 10 year bond with annual coupons has face value 500 units and coupon rate of two
per cent. Because the bond is seen as a "safe refuge", during uncertain times the
price is bid up.
a) Calculate by how much the (second hand market) price would need to rise to
in order for the yield received by a purchaser to fall to zero.
b) If the bond had no coupons what yield would be the result of an increase in its
second hand market price by 50%?
c) If, instead, the bond had only coupons (a perpetuity), what price would drive
the yield to zero? What yield would emerge from an increase in its second
hand market price by 50%?
d) Briefly explain the contrasts in yield behaviour between non-coupon bonds,
coupon bonds with short maturities, coupon bonds with finite but long
maturities and perpetuities. Explain which type is most likely to have negative
yields and why?
e) Briefly explain why, when yields actually go negative, they do so by small
amounts.