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Bonds 102: Bond Duration

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1.
How will the market price of a 5 percent coupon bond most likely respond if newer bonds are issued at 7 percent?
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It will fall. Investors will be able to choose between the 5 percent bond and new 7 percent bonds. To entice someone to buy the 5 percent bond, the seller will have to discount its price so that the new owner will earn the same dollar amount in interest, but will have paid less than $1,000 to buy it, thus raising his or her yield closer to 7 percent.
2.
Which of the following best describes interest rate risk?
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Rising interest rates will make bonds less valuable. The higher that interest rates go, the less attractive fixed-rate bonds will be on the secondary market.
3.
A bond is issued with a stated value, known as its par value.
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True. A bond's stated value is its par, or face value. This is the value at which the bond will be bought back by the issuer upon its maturity.
4.
In which of the following ways is a bond's duration expressed?
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As a number of years. A bond's duration is expressed as a number of years from the purchase date.
5.
Which of the following best describes the correlation between bond duration and coupon rates?
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The higher the coupon rate, the shorter the duration. In other words, the more money coming in now (because of a higher rate), the faster the bondholder will recover its cost.