Explain the relationship between a bond's yield and its price. (2 marks) A 10 year bond has a yield to maturity of 4%. Which would result in the largest % change in the bond's price, a rise in the yield to 5% or a fall to 3%? Why? (2 marks) Suppose a recently published report indicates inflation in both Canada and the U.S. is at an all time low and the Canadian dollar is strengthening. You hear a news report that the bond market has rallied (prices have increased). Which of the following Canadian bonds would likely show the highest % price increase? Why? (4 marks) . Low coupon, short-term High coupon, long-term High coupon, short-term Low coupon, long-term . Calculation Questions Calculate the price of these bonds. SHOW YOUR WORK. (4 marks) a) 2-year Quebec 5.00% semi-annual, $100 par value. Investors require a yield to maturity of 6% compounded semi-annually. Mode= N= P/Y = C/Y= I/Y= PMT= FV= PV = b) 2-year Government of Alberta strip bond, $100 par value. Investors require a yield to maturity of 6% compounded annually. Mode N= P/Y = C/Y= I/Y= PMT= FV= PV = . Calculate the yield to maturity for the following bonds. SHOW YOUR WORK (4 marks) a) 3-year Canada 5.50% semi-annual, priced at 98.14 Mode N= PY = C/= PMT= FV= PV = I/Y= b) 11-year Canadian Tire 12.10% annual, priced at 13920 Mode- N= P/Y = C/Y= PMT= FV= PV = I/Y= Calculate the annualized yield on a 91 day T-bill purchased at 98.5 SHOW YOUR WORK. (2 marks) Complete the sentences by deleting the inappropriate terms. (5 marks) If interest rates are expected to rise, investors should buy [High/Low] coupon, [Long / Short] term bonds because they are less volatile and will therefore have a smaller % of [Income /Capital Gain / Capital Loss] The difference between what commercial paper is purchased for, and what it matures at, is taxed as [Income / Capital Gain / Capital Loss] Bond prices are more sensitive to a 1% change in yield when yields are initially [High/Low]