Answer to Question #89937 in Other for Abid Ali

Question

The below chart shows the Price-Yield relationship for two Rs.500-par-value bonds i.e. Bond 1 and Bond 2 having equal coupon rate of 10% with maturity of 4 and 8 years respectively. Each price-yield curve represents a set of prices for that bond plotted against different assumed market required rates of return (market yields).

Requirement:
1. Why the price-yield curve of Bond 2 is steeper than Bond 1 in given line graph? How does it affect the investor holding Bond 2?
2. Why the bond prices vary from their par value when coupon rate is different from market required rate of return?

Answer 1

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