Shift in Demand of Bonds

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Investment Analysis and Portfolio Management

Economics
Answer – 1
There are some bonds that are issued in order to provide a discount on the face value of the
bonds, still, there are no visible interest rates observed on them. The interest acquired on these
bonds is referred to a coupon. These bonds are also called zero-coupon bonds because of the zero
dividends or interest rate they provided. These bonds are bought at the market value and after
their maturity; they are repaid at their face value (Deegan, 2011). The difference between the
amount of market value and face value is termed to be a coupon. For this particular assignment,
there are 4 major bonds that are needed to be analyzed and computed. All the bonds can be
understood with the help of an example. The bonds will be held for 1 year because of which time
will not be a factor while making the comparison. Expected return rate if the market price of the
bond is $800.
A. The face value of a given zero coupon bond is stated to be $1000. The time period and in
which it will mature is one year.
Computation of the into maturity = {(face value /the current price of the bond) ^ (1/years to
maturity)} -1
If the market price of the bond is $800 then the component as asked for the assignment will
yield= {(1000/800) ^ (1/1)}-1
=1.25-1
=0.25
=25%
Hence the expected return rate of the bond is 25%.
It should have been observed that there are no present market risks that can hamper the financial
position because of the negligible contingency and reactivity of the market. If a bond has been
issued at the market price, it is very much certain to be repaid at the face value of the par value
(Body. Kane & Marcus, 2014). This type of bonds is very popular among the investors because
they provide a high degree of reliability and also ensure the investor about the returns he has
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Economics
received from their investment at the end of the bond period. The zero coupon bonds are also
said to act as market thresholds because the rate fluctuate based on the zero coupon bond rates as
well. These bonds are also said to be volatile in nature because of which they do not offer any
kind of fixed return rate in a given period of time and also the yield depends on the bond types
and issuers (Titman, Martin, Keown & Martin, 2016).
The bond which yields 25% will be greater than the interest rates that are provided by most of
the other investment opportunities because of which demand of the bond will exceed the supply.
Increase in the interest rate of the market will be observed and inflationary tendencies in the
economy can also be noticed.
B. The expected return of the market rate of the bond is $950.
The given face value of a zero coupon bond is $1000. The time to maturity is 1 year.
Computation of r, i.e. yield to maturity is = {(face value/current price of the bond) ^ (1/years to
maturity)} -1
If the market price is $800, the r component as asked for in the assignment, which is nothing but
yields to maturity is computed as= {(1000/950) ^ (1/1)}-1
= 1.053-1
= 0.053
= 5.3%
The expected return of the bond is 5.3 %.
It has been observed that there are no present market risks because of the negligence of
contingency and reactivity to market. As mentioned earlier ones upon have been issued attar
market price then it will be surely repaired at its par price. Also, it has been observed that the
bond will mature in a year hence there will be no contingencies related to it till the maturity.
These bonds are also termed to be very popular among investors.
The coupon provided on zero coupon bonds are also said to act as the market thresholds. The
rates are said to fluctuate on the basis of the zero coupon bonds rates as well. They are termed to
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Economics
be volatile because they do not offer any kind of eggs return rate during a given period of time.
Hence the yield on the bonds is subjective to the bind types and issuers. The market will be said
to have an equilibrium position because the bond yield will be the same as most of the interest
rates.
The expected return of the market price of the bond is $1000.
The face value of a given zero coupon bond is $1,000 and the time to maturity is one year
Computation of r, i.e. yield to maturity is = {(face value/current price of the bond) ^ (1/years to
maturity)} -1
If the market price is $800, the r component as asked for in the assignment, which is nothing but
yields to maturity is computed as= {(1000/1000) ^ (1/1)}-1
= 1-1
=0
The expected return date of the bond is 0%.
There are no market risks present because of the negligence of the contingency and reactivity to
the market. The bond will mature in a year and there is no contingency in relation to the maturity
as well. The bond will be repaired at its par value because of which it is extremely popular
among the investors (Mankiw, 2010). The bond is volatile in nature and is not providing any
kind of picas return rate for the given period of time because of which it is subjected to the bond
types and issuers.
No return will be observed on the bonds because of which the bond will not be attractive for
investors and hence the market rate will tend to go down.
C. The expected return of the market price of the bond is $1250.
The given face value of a zero coupon bond is $1000. The time to maturity is 1 year.
Computation of r, i.e. yield to maturity is = {(face value/current price of the bond) ^ (1/years to
maturity)} -1
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