Question

QUESTION 19 (1) The value (price) of a bond is inversely related to changes in interest rates (and yield-to-maturity). (2) Holding yields constant, price will converge to par value as we approach the maturity date of a bond. (1) is True but (2) is False (1) is False but (2) is True (1) and (2) are both False (1) and (2) are both True.

Answer 1

Statement (1) is true

There is inverse relationship between bond prices and interest rates (or yield to maturity); if the interest rate increases, the price of bond will decrease and in the interest rate will decrease, the price of bond will increase. Interest rate is used as discount rate in bond price calculation and when the discount rate of a bond increases, the price of bond decreases and vice versa

Statement (2) is true

Holding yield constant; the price will converse to par value as we approach the maturity date of the bond. The bond price will reduce if it is selling at premium and bond price will increase if it is selling at discount.

Therefore statement (1) & (2) are both true