QUESTION 15 The lower is the discount rate a higher is the Y

QUESTION 15 The lower is the discount rate a. higher is the YTM O b. lower is the YTM O C. higher is a bonds value O d. both a and c QUESTION 16 The approximate yield to maturity of a bond is equal to O a. average return/ purchase price O b. average return/average price Od. both b and c

Solution

15.

Bond value is inversely propotional to the discount rate because it is the discounted present value of the future payments.

So lower the discount rate, Higher the Bond Value

So answer is C

YTM and discount rate are one of the same thing

16.

A is the answer

Yield to maturity of a bond is average return / purchase price.

For example: let us take example of zero coupon bond

Purchase price = 90

Par value = 100

Time = 1 year

Future Price = Present price * (1+r)^n

100 = 90 * (1+r)^1

So r = (100/90)-1 = 11.11%

This is nothing but ( 100 - 90 ) / 90 = Return / purchase price.