 # Bonds

## Question

Conference topic. (Bonds)
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.”

## Solution Preview

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Bonds
(1) The required rate of return is the profit an investor needs to receive in order to buy the underlying security. Consequently, there is an inverse relationship between the value of a bond and the current interest rate because it is the current interest rate that determines the spread, and by extension the demand for a bond. When the investor’s required rate of return reduces, the price that...
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