What will be the effect of sharp increase in interest rates on open market prices of two fixed income securities?
both securities are next to same terms
Answers:
The open market price of a fixed income payment, such as a corporate or policy bond, typically moves within a direction disparate to the direction of interest rates. For example, if a $1,000 bond pays 7 percent interest and the interest rate in the souk for such bonds is 7 percent, the bond will put up for sale for $1,000. If the bazaar rate of interest increases to 8 percent, investors will not be prepared to repay $1,000 for the 7% bond. Therefore the bond price will hold to disappear to the point where on earth the bond yield 8 percent. The bond will get rid of at a discount.
On the other mitt, if the flea market rate of interest decrease to 6 percent, investors will want the 7% bond and will fast bid up its price to the point where on earth the return on the investment is 6 percent. The bond will put on the market at a premium.
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Answers:
The open market price of a fixed income payment, such as a corporate or policy bond, typically moves within a direction disparate to the direction of interest rates. For example, if a $1,000 bond pays 7 percent interest and the interest rate in the souk for such bonds is 7 percent, the bond will put up for sale for $1,000. If the bazaar rate of interest increases to 8 percent, investors will not be prepared to repay $1,000 for the 7% bond. Therefore the bond price will hold to disappear to the point where on earth the bond yield 8 percent. The bond will get rid of at a discount.
On the other mitt, if the flea market rate of interest decrease to 6 percent, investors will want the 7% bond and will fast bid up its price to the point where on earth the return on the investment is 6 percent. The bond will put on the market at a premium.