Yield To Maturity, (Current Price Of Bonds
a) r =├ ( $1000/$800┤)^(1/1)-1= 0.25 = 25%
b) r =├ ( $100/$950┤)^(1/1)-1= 0.053 = 5.3%
c) r =├ ( $1000/$1000┤)^(1/1)-1=0 = 0%
The yield to maturity may change over the years depending on the changes in the overall demand for bonds in the market. If the investors become more willing to hold bonds due to economic uncertainty, then the bond prices will rise which will reduce the yield (Ross, 2016). In this case, when the price of bond increases from $800 to $950, the yield to maturity rate drops by 19.7% (from 25% to 5.3%). Similarly, when the bond price increases and becomes equal to face value ($1000) giving the yield rate to be 0%, it normally happens …show more content…
Zero coupon bonds do not pay coupons or interest payments to the bondholder, because the bondholder only receives the face value of the bond at maturity which $1,000 next year (Langager, 2016).
3.) Bond’s supply and demand determine the interest rate in the bond market which makes bond becomes the tradable commodity where investors buy bonds, while businesses and government supply bonds. Hence, the intersection between demand and supply functions in the bond market determines the bond’s market price and quantity. Demand function represents the relationship between the quantity demanded and the market price of bonds when all other economic variables are constant. In Figure 1.0 the demand functions show a negative slope moving from point A to point B, it is when the price of bonds decreases and the market interest rate increases causing the investors buy more …show more content…
First, a business expansion of growing income and wealth will increase the investors’ demand for bonds, thus, the demand curve shifts to the right (Multimedia Portal Univesity of Nairobi, n.d.). Another factor is when the bond’s risks are relatively small and able to produce a stable and safer bond market which will increase the bond demand. In addition, a high level of bond demand occurs when there is low information cost, as investors continually depending unto the new information to make decisions in investing bonds, which makes the investors keep buying the bonds by acquiring low-cost and relevant information given (Szulczyk, 2015). Tesfatision (2011), stated that an increase in future expected interest rates lowers the expected return rate for long-term bond causing demand curve shifts to the left as investors will purchase bonds in the future when the bond prices are cheaper. Besides that, a rise in expected inflation rate will cause the demand curve to shift leftward, because inflation erodes the purchasing power of households, businesses and government; which also deflate the investment’s value, as a result, investors will invest less in the long-term bond (Szulczyk,