Sophie is thinking of investing in the money market and Dylan is interested in the bond market. Monash Co. is offering commercial paper for 180 days with a face value of $10,000. It is also offering 5-year, $100,000 face value bonds that pay a coupon of 6% semi-annually. Sophie has $900,000 to invest and wants to earn a YTM of 2% p.a. while Dylan has $800,000 to invest at a YTM of 5.5% p.a.

What type of and how many Monash Co. debt securities will Sophie and Dylan each buy?

 

Continuing from above question, the official cash rate increases by 50 bp, and this change causes an equivalent impact on debt investor YTMs. Does the number of debt securities that Sophie and Dylan buy change and if so by how many?

 

Explain the inverse relationship between YTM and price. Why do prices fall as yield increases and vice versa? Does this relationship only apply to debt securities or to other asset classes as well?

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