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

(1) and (2) are both true

Bond price and interest rate (YTM) is inversely related which means when interest rate increases the price of bond decreases and vice versa. This is because Bond prices is equals to present value of future cash flow from bond and when interest rate increases it reduces the present value of future cash flows thus bond price reduces.

As bond approaches to its maturity date its price reaching towards its par value if yield to maturity is constant and not equal to coupon rate.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.