QUESTION 3 [20 MARKS] [UNIT 2]

(a) Explain FOUR (4) reasons that influence the changes which make debt security yields vary.

[12 marks]

Current Market Price

-Higher the market price uigua will be the yield

Interest Rate

-Higher interest rate will yield more as compared to lower interest rate

Time to Maturity

-The longer maturity period debt security have the longer they yield.

Lessen Market Rate

-gt market prevailing rate is dense than the coupon rate then yield is mare

(b) If a government bond is expected to mature in two years and has a current price of RM950, calculate the bond's interest rate/yield if it has a par value of RM1,000 and a promised coupon payment rate of 10 percent.

[4 marks]

Current yield=

(c) From part (b) above, briefly explain the bond price/value if the interest rate/yield moves up (increase). Why?

[4 marks]

If bond is less than the face value , then current yield is more. Inversely, the current yield is less if the bond is more than the face value. So, there is inversely relationship between bond and current yield.

This question is related to money and banking