Consider two bonds, A and B. Both bonds presently are selling at their par value
ID: 2852189 • Letter: C
Question
Consider two bonds, A and B. Both bonds presently are selling at their par value of
$1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond
B will mature in 10 years. If the yields to maturity on the two bonds change from 12%
to 14%, _________.
(A)both bonds will increase in value but bond A will increase more than bond B.
(B) both bonds will increase in value but bond B will increase more than bond A.
(C) both bonds will decrease in value but bond A will decrease more than bond B.
(D)both bonds will decrease in value but bond B will decrease more than bond A.
Explanation / Answer
The longer the maturity, the greater the price change when interest rates change.
(D)both bonds will decrease in value but bond B will decrease more than bond A.