Financial Information
A deposit of 12 years an annual coupon of 9%. The coupon is fixed until the loan. Th
a. The bond currently sells at a price below their Nennwert.b. If market interest rates decline, the bond price also sinken.c. If the market interest rates remain unchanged, the bond price in a year are now lower than today ist.d. If market interest rates remain unchanged, the bond price one year from now will be higher than it is today.
The answer is (c) – but not for the reason that the above person answered.
We need to know the price of the bond at purchase or the yield to maturity at purchase to figure this out because bonds with a lower interest rate than the coupons are sold at a premium than the principle (which amortizes as time approaches maturity). Conversely, a bond with a higher interest rate than the coupons are sold at a discount to the principle (where the negative balance amortizes upward as time approaches maturity).
So (a) isn’t right if the yield is below 9%, but it is right if it is above 9%.
(b) is always wrong because bond prices are inversely related to interest rates.
(c) is wrong if the yield today is higher than 9%, but right if the yield is lower than 9%.
(d) is wrong if the yield today is lower than 9%, but right if the yield is higher than 9%.
Since you can’t have two right answers on the same question (a and d), I’m going to say that correct answer is (c)