Having determined how to calculate the value of a bond (Bond Price) and the effective rate of return of bond (i) you should now be able to derive or explain some key bond relationships.
Bond Price = Coupon X 1 – 1/(1+i)N + Face Value X 1 i (1+i)
Using the above bond formula, your reading assignments and basic logic, answer each of the following three Bond relationship questions in a brief paragraph of 50 to 75 words.
1. Logically explain in your own words the following bond relationship and why it works:
“The value of a bond in the market is inversely related to changes in the current market interest rate.”
2. Explain what bond market condition would result the market price of a bond being less than par and what bond market condition would result in the market price of a bond being greater than par.
3. Explain what happens to the market price of a bond as the bond approaches its maturity date.
9 years ago
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