Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a

Question

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?

Select one:

b. Bond X has the greatest reinvestment risk.

c. If market interest rates decline, the prices of all three bonds will increase, but Z's price will have the largest percentage increase.

d. If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.

e. If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.

Explanation / Answer

If the bonds market interest rate remains at 10%, bond Z's price will be lower one year from now than it is today.

Bond Z has 12% annual coupon and if after one year the interest rate remains 10% than bond Z's price will be lower from today.

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