Briefly describe the price performance (or price changes) of the following bonds in the specified situations
Briefly describe the price performance (or price changes) of the following bonds in the specified situations.
a) a callable bond, if market yields have decreased
b) an extendible bond, if interest rates have increased
c) a convertible bond, if stock price > conversion price
d) a high yield bond, if the economy is in recession ,
Answer
- The price of a callable bond would appreciate if market yields have decreased, as the issuer has the option of redeeming the bond at a certain price and the decrease in market yields would make the redemption price more attractive.
- The price of an extendible bond would generally decrease if interest rates have increased, as the bond’s coupon rate would no longer be competitive in relation to the current interest rate environment.
- The price of a convertible bond would appreciate if the stock price is greater than the conversion price, as investors have the option of converting the bond into shares of the company at the conversion price.
- The price of a high yield bond would likely decrease if the economy is in recession, as investors would be more likely to demand higher yields for the additional risk associated with the bond.
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