Consider a $1,000 bond with a fixed-rate 10 percent annual coupon rate and a maturity ( N ) of 10 years. The bond currently is trading at a yield to maturity (YTM) of 10 percent.
a. Complete the following table:
Use this information to verify the principles of interest rate–price relationships for fixed-rate financial assets. Rule 1. Interest rates and prices of fixed-rate financial assets move inversely. Rule 2. The longer is the maturity of a fixed-income financial asset, the greater is the change in price for a given change in interest rates. Rule 3. The change in value of longer-term fixed-rate financial assets increases at a decreasing rate. Rule 4. Although not mentioned in Appendix 9A, for a given percentage (±) change in interest rates, the increase in price for a decrease in rates is greater than the decrease in value for an increase in rates.
The following questions and problems are based on material in Appendix 9B to the chapter.