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14 September, 13:38

What relationship exists between the coupon interest rate and yield to maturity and the par value and market value of a bond? Explain. (Select the best answer below.) A. The market value of the bond approaches its par value as the time to maturity increases. The yield-to-maturity approaches the coupon interest rate as the time to maturity increases. B. The market value of the bond approaches its par value as the time to maturity declines. The yield-to-maturity approaches the coupon interest rate as the time to maturity increases. C. The market value of the bond approaches its par value as the time to maturity increases. The yield-to-maturity approaches the coupon interest rate as the time to maturity declines. D. The market value of the bond approaches its par value as the time to maturity declines. The yield-to-maturity approaches the coupon interest rate as the time to maturity declines.

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  1. 14 September, 13:59
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    D. The market value of the bond approaches its par value as the time to maturity declines. The yield-to-maturity approaches the coupon interest rate as the time to maturity declines.

    Explanation:

    Regardless of the market rate, the cash flow of the bond are fixed.

    Thus, at maturity if the bond face value is 1,000 it will be traded at 1,000

    days before it will be traded at 1,000 less the market discount rate but, they exposure to interest will be fewer than 10 years ago thus, their effect minimize. As time passes the market value gets closer to maturity

    Same is throught for the YTM as time passes the interest weight in the market value decreases and thus, the maturity which tends to match face value increases. making the YTM closer than the actual bond rate.
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