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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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