## Question

###### Table 10-2 Impact of time to maturity on bond prices Time Period in Years to Maturity...

Table 10-2 Impact of time to maturity on bond prices Time Period in Years to Maturity (10% Interest Payment, Various Times to Maturity) Bond Price with 8% Bond Price with 12% Yield to Maturity Yield to Maturity $1,000.00 1,018.52 1,079.85 1,134.20 1,171.19 1,196.36 1,213.50 1,225.16 $1,000.00 982.14 927.90 887.00 863.78 850.61 843.14 838.90

Refer to Table 10-2 a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 5-year, a 25-year, and a 30-year time period. Bond Price Maturity 5 year 25 year 30 year b. Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. Using column 3, indicate what the bond price will be with a 5-year, a 25-year, and a 30-year period. Bond Price Maturity 5 year 25 year 30 yearſ

c. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. If interest rates in the market are going down, which bond would you choose to own? 5 Years 25 Years 30 Years d. Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. If interest rates in the market are going up, which bond would you choose to own? 5 Years 25 Years O 30 Years

## Answers

a). Bond price can be directly from column 2 of above table for YTM of 8%

Maturity Bond Price 5 $1079.85 25 $1213.50 30 $1225.16 b). Bond price can be directly from column 3 of given table for YTM of 12%

Maturity Bond Price 5 $927.90 25 $843.14 30 $838.90 c). When interest rate are going down, price of long term bonds will decrease more as compare to short term bonds, So it is beneficial to hold short term bond. So option a is correct.

d). When interest rate are going up, price of long term bonds will increase more as compare to short term bonds, So it is beneficial to hold long term bond. So option c is correct.

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