Bond X is callable and matures in 10 years. Bond Y is non-callable and matures i
ID: 2778939 • Letter: B
Question
Bond X is callable and matures in 10 years. Bond Y is non-callable and matures in 30 years. If interest rates in the bond market rise, which of the following statements is correct?
Both bonds will rise in value but Bond X will rise less than Bond Y.
Bond X will be called while Bond Y will fall in value.
Both bonds will fall in value but Bond Y will fall more than Bond X.
Bond X will rise in value and Bond Y will rise in value, but Bond Y will rise less than Bond X.
Both bonds will experience an equal percentage decline in value.
a.Both bonds will rise in value but Bond X will rise less than Bond Y.
b.Bond X will be called while Bond Y will fall in value.
c.Both bonds will fall in value but Bond Y will fall more than Bond X.
d.Bond X will rise in value and Bond Y will rise in value, but Bond Y will rise less than Bond X.
e.Both bonds will experience an equal percentage decline in value.
Explanation / Answer
Ans is option c,
Increase in interest rate will reduce the value of call option and increases the value of callable bond, thereby they outperform non callable bonds
Therefore, bond Y value will fall more than Bond X