Which of the following statements is correct? a. You hold two bonds, a 10-year,
ID: 2674154 • Letter: W
Question
Which of the following statements is correct?a. You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.
b. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
Explanation / Answer
That would be A. The zero coupon bond receives the larger decline because of its lack of coupon payments.