Which of the following can cause an increase in the price of a discount bond? a. An increase in the YTM. b. A decrease in the YTM. c. The passage of time. d. Both A and C e. Both B and C

Price of the bond is calculated using present value of future cash flows. while calculating present values of the cash flows or price of the bond, we use YTM for discount purpose. As we that higher rate gives lower Present value and Lower rate gives higher present value. Interest rate behave inversely with present value. So the reduction in YTM will increase the price of the bond.

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andromache andromache · Answer 2 · 2022-03-08T13:21:03+01:00

When there is an increase in the price so there should be decrease in YTM. Option b is correct.

Increment in price impact on YTM:

The bond price should be determined by applying the present value with respect to the future cash flows. In this, we applied the YTM for the discount rate. In the case when there is a high rate so the present value should be less while if there is a low rate so the present value should be more. That means it shows an inverse relationship.

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