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Chapter 4: Q.4 (page 133)

Do bondholders fare better when the yield to maturity increases or when it decreases? Why?

Short Answer

Expert verified

When yield to maturity decreases bondholders fare better.

Step by step solution

01

Step 1. Introduction

Bonds are debt instruments that are used to raise funds. These instruments can be issued by the government or crporate organizations. A bondholder is a person who invests in or owns debt instruments. By holding a bond, the investor is lending money to the government or business. In return, they get principal along with interest when the bonds mature.

02

Step 2. Explanation

The bondholders fare better when Yield to maturity decreases because price increases when yield to maturity decreases. Similarly, it states that there is negative relationship between yield to maturity and bond prices.

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Most popular questions from this chapter

What is the formula used to calculate the yield to maturity on a 20-year coupon bond with a current yield of 12% and \(1,000 face value that sells for \)2,500

What is the yield to maturity on a \(10,000-face-value discount bond, maturing in one year, which sells for \)9,523.81?

Property taxes in a particular district are 2% of the purchase price of a home every year. If you just purchased a \(150,000 home, what is the present value of all the future property tax payments? Assume that the house remains worth \)150,000 forever, property tax rates never change, and a 4% interest rate is used for discounting.

To help pay for college, you have just taken out a \(1,000 government loan that makes you pay \)126 per year for 25 years. However, you don’t have to start making these payments until you graduate from college two years from now. Why is the yield to maturity necessarily less than 12%? (This is the yield to maturity on a normal \(1,000 fixed-payment loan on which you pay \)126 per year for 25 years.)

Would $200, which is to be received in exactly one year, be worth more to you today when the interest rate is 12% or when it is 17%?
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