An Asset's Maturity Is a Factor That Affects Its Price

question 6

Essay

An asset's maturity is a factor that affects its price sensitivity to a change in yield. In fact, a bond's price sensitivity to a change in the discount rate is positively related to the bond's maturity. Consider the case of two bonds that have the same coupon rate, and the same required yield but different maturities. If the required rate were to change, the price sensitivity of the bond with the longer maturity would be greater than that of the bond with the shorter maturity. Give an illustration of this.

---

Definitions:

Present Value

The value today of a future sum of money or sequence of cash payments, calculated using a specific return rate.

Lease Payments

Payments made under a lease agreement by the lessee to the lessor for the use of an asset over the lease term.

Present Value

The current worth of a future sum of money or stream of cash flows given a specified rate of return, often used in evaluating investment opportunities.

Interest Rate

The ratio of interest charged on a loan to the borrower, usually represented as a yearly percentage of the remaining loan amount.