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Chapter 4: Q5DQ (page 319)

Why is the remaining time to maturity an important factor in evaluating the impact of a change in yield to maturity on bond prices?

Short Answer

Expert verified

The remaining time to maturity would provide an increasing trend with a lower yield to maturity than a higher yield to maturity.

Step by step solution

01

Time to maturity

Time to maturity is the period after which security (specifically bond) matures and the principal amount is received back. The periodic return from the security is provided through the maturity period.

02

Relevance of time to maturity

Evaluating the impact of change in yield to maturity on bond prices is also affected by the time to maturity. A decrease in the yield to maturity rate would provide increasing bond price. And an increase in the yield to maturity would provide an decreasing bond price trend.

Also, the bond price would be affected only if the yield to maturity is not equal to the bond interest rate. If the yield to maturity equates with the bond鈥檚 interest rate, then the bond price would not change for any maturity period.

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Most popular questions from this chapter

Bonds issued by the Coleman Manufacturing Company have a par value of \(1,000, which of course is also the amount of principal to be paid at maturity. The bonds are currently selling for \)690. They have 10 years remaining to maturity. The annual interest payment is 13 percent ($130). Compute the yield to maturity

If, as an investor, you had a choice of daily, monthly, or quarterly compounding, which would you choose? Why?

Question: Phil Goode will receive $175,000 in 50 years. His friends are very jealous of him. If the funds are discounted back at a rate of 14 percent, what is the present value of his future 鈥減ot of gold鈥�?

Question: Mrs. Crawford will receive $7,600 a year for the next 19 years from her trust. If a 14 percent interest rate is applied, what is the current value of the future payments?


Question:Ecology Labs Inc. will pay a dividend of \(6.40 per share in the next 12 months (D1). The required rate of return (Ke) is 14 percent and the constant growth rate is 5 percent.

a. Compute P0. (For parts b, c, and d in this problem, all variables remain the same except the one specifically changed. Each question is independent of the others.)

b. Assume Ke, the required rate of return, goes up to 18 percent. What will be the new value of P0?

c. Assume the growth rate (g) goes up to 9 percent. What will be the new value of P0? Ke goes back to its original value of 14 percent.

d. Assume D1 is \)7.00. What will be the new value of P0? Assume Ke is at its original value of 14 percent and g goes back to its original value of 5 percent.
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