Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Chapter 4, Problem 2Q
“Short-term interest rates are more volatile than long-term interest rates, so short-term
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“Short-term interest rates are more volatile than long-term interest rates, soshort-term bond prices are more sensitive to interest rate changes than arelong-term bond prices.” Is this statement true or false? Explain.
Short-term interest rates are more volatile than long-term interest rates. Despite this, rates of return on long-term bonds are more volatile than rates of return on short-term securities. How can these two empirical observations be reconciled?
Explain why bond prices fluctuate in response to changing interest rates. What adverse effect might occur if bond prices remain fixed prior to their maturity?
Chapter 4 Solutions
Intermediate Financial Management
Ch. 4 - Short-term interest rates are more volatile than...Ch. 4 - The rate of return on a bond held to its maturity...Ch. 4 - If you buy a callable bond and interest rates...Ch. 4 - A sinking fund can be set up in one of two ways....Ch. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Current Yield for Annual Payments Heath Food...Ch. 4 - Determinant of Interest Rates
The real risk-free...Ch. 4 - Default Risk Premium A Treasury bond that matures...Ch. 4 - Prob. 6P
Ch. 4 - Bond Valuation with Semiannual Payments
Renfro...Ch. 4 - Prob. 8PCh. 4 - Bond Valuation and Interest Rate Risk The Garraty...Ch. 4 - Prob. 10PCh. 4 - Prob. 11PCh. 4 - Bond Yields and Rates of Return A 10-year, 12%...Ch. 4 - Yield to Maturity and Current Yield You just...Ch. 4 - Current Yield with Semiannual Payments
A bond that...Ch. 4 - Prob. 15PCh. 4 - Interest Rate Sensitivity
A bond trader purchased...Ch. 4 - Bond Value as Maturity Approaches An investor has...Ch. 4 - Prob. 18PCh. 4 - Prob. 19PCh. 4 - Prob. 20PCh. 4 - Bond Valuation and Changes in Maturity and...Ch. 4 - Yield to Maturity and Yield to Call
Arnot...Ch. 4 - Prob. 23PCh. 4 - Prob. 1MCCh. 4 - Prob. 2MCCh. 4 - How does one determine the value of any asset...Ch. 4 - Prob. 4MCCh. 4 - What would be the value of the bond described in...Ch. 4 - Suppose a 10-year, 10% semiannual coupon bond with...Ch. 4 - Prob. 9MCCh. 4 - Prob. 10MCCh. 4 - Prob. 11MCCh. 4 - Prob. 12MCCh. 4 - Prob. 14MCCh. 4 - Prob. 15MCCh. 4 - Prob. 16MCCh. 4 - Prob. 17MC
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- Which one of the following statements is NOT true? As interest rates increase, bond prices increase. Interest rate risk is the risk that bond prices will change as interest rates change. Interest rate changes and bond prices are inversely related. Long-term bonds have more price volatility than short-term bonds of similar riskarrow_forwardIs the price of a long term bond or the price of a short term security more sensitive to a change in interest rates? Why?arrow_forwardWhen it comes to bond values, what role do interest rates play? How can you value a bond if you don't know what the fundamental assumptions are.arrow_forward
- 1. "If the bonds of different maturities are perfectly substitute, their interest rates are more likely to move together". Is this statement true or false or uncertain? Discuss using theory of expectation. Note: Your answers should be detailed with proper references.arrow_forwardWhy do bonds offer lower average rates of return thanstocks?arrow_forwardWhen the bond prices rise, interest rates fall. True FalsEarrow_forward
- why modified duration is a better measure than maturity when calculatinga bond’s sensitivity to changes in interest rates.arrow_forwardIs the price of a long-term (longer-maturity) bond more or less sensitive to changes in interest rates than that of a short-term bond? Why?arrow_forwardWhy are bonds' typical rates of return lower than those of stocks?arrow_forward
- 3. If interest rates rise, prices of short-term bonds will decline less than long-term bonds. Is this true or false? Why?arrow_forwardWhat is the link between the level of interest rates and the price of bonds? Why does this connection have to be true? How has the present interest rate environment affected bond prices?arrow_forwardPrices of long-term bonds are more volatile than prices of short-term bonds. However, yields to maturity of short-term bonds fluctuate more than yields of long-term bonds. How do you reconcile these two empirical observations?arrow_forward
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