Asked by Kitty Dollas on May 27, 2024
Verified
If the payment stream of a bond remains the same and the price of the bond goes down, the:
A) effective yield is unchanged.
B) effective yield rises.
C) effective yield decreases.
D) bond is reissued to reflect the higher interest rate.
E) bond is reissued to reflect the lower interest rate.
Payment Stream
A sequence of payments made over time, often associated with loans or investments.
Effective Yield
A measure of the return on an investment, taking into account the effect of compounding interest.
Bond Price
The amount of money investors are willing to pay for a bond, which can fluctuate based on interest rates, credit risk, and other factors.
- Develop insight into the mechanics of bond valuation, considering the factors that determine the pricing of bonds and their returns.
Verified Answer
NB
Nicholas BurtonMay 31, 2024
Final Answer :
B
Explanation :
When the price of a bond goes down and the payment stream remains the same, the yield on the bond increases. This is because the bond is now paying a higher yield relative to its new, lower price. Therefore, the effective yield of the bond rises.
Learning Objectives
- Develop insight into the mechanics of bond valuation, considering the factors that determine the pricing of bonds and their returns.