Discussion on Bond
Having determined how to calculate the value of a bond (Bond Price) and the effective rate of return of bond (i) you should now be able to derive or explain some key bond relationships
Bond Price = Coupon X
1 – 1/(1+i)N + Face Value X 1 i (1+i)
Using the above bond formula, your reading assignments and basic logic, answer each of the following relationship questions in a brief one paragraph posting
1. Logically explain in your own words the following bond relationship and why it works: “The value of a bond is inversely related to changes in the investor’s present required rate of return (the current interest rate).”
2. Explain what bond market condition would result the market price of a bond being less than par and what bond market condition would result in the market price of a bond being greater than par.
3. Explain what happens to the market price of a bond as the bond approaches its maturity date.
4. Logically explain in your own words the following bond relationship, and why it work so: “Long term bonds have a greater interest rate risk than do short term bonds.”