FIN 3005 FIN3005 Week 4 Individual Work 2 (Everest University)

FIN3005 Week 4 Individual Work 2 (Everest University)

Questions and Applications

2. How interest rates affect bond prices. Explain the impact of a decline in interest rates on:

3.  Relevance of bond price movements. Why is the relationship between interest rates and bond prices important to financial institutions?

5.  Exposure to Bond Price Movements. How would a financial institution with a large bond portfolio be affected by falling interest rates? Would it be affected more than a financial institution with a greater concentration of bonds (and fewer short-term securities)? Explain.

7. Coupon Rates. If a bond’s coupon rate were above its required rate of return, would its price be above or below its par value? Explain.

9.  Required Return on Bonds. Why does the required rate of return for a particular bond change over time?

10. Inflation Effects. Assume that inflation is expected to decline in the near future. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation? Explain.