1) Fill in the blanks to complete the passage about the relationship between bond prices and bond interest rates. Drag word(s) below to fill in the blank(s) in the passage. When the price on a $10,000 twenty-year bond rises, the interest rate –. This is because interest on a bond is – to the bond holder. When cost – and payoff –, profit goes down.

(remains the same, goes up, payment, goes down, cost)

2) Bond prices and yields are positively related.

True

False

3) have a residual claims on assets and income.

Common stockholders

Preferred stockholders

Secured bondholders

Unsecured bondholders

Answer:

1. When the price on a $10,000 twenty-year bond rises, the interest rate goes down. This is because interest on a bond is payment to the bond holder. When cost goes up and  payoff remains the same, profit goes down.

2. 

False; Bond prices & yields are inversely related

Example:- A bond with a 10% coupon at its $1,000 face value & market price also as $1000, the yield is 10% (1 year bond)

Market price of Bond = (Coupon Payment ×(1−(1+r)^-n))/r+Face Value of Debt/(1+r)ⁿ

where Coupon payment = Coupon Payment= (Rate of Bond/ No. of Payments per year)*Face Value of Debt

But if Market price changes to $800; Yield will become 37.5%

So there is an inverse relationship between bond price & yield.

3. 

The  answer is Common Stockholders.

Note:

The Secured bondholders have the first right over the assets and income of the company. Then the unsecured bondholders have the right after the Secured bondholders. After the Secured bondholders and the unsecured bondholders, the prefernce shareholders have the right to the assets and the income. At the end, the common stockholders have the residual claim on the income and assets of the company.