Consider two bonds, X and Y. Each pays a coupon rate of interest of 8% semi-annually....

Consider two bonds, X and Y. Each pays a coupon rate of interest of 8% semi-annually. Bond X will mature in 3 years while Bond Y will mature in 2 years. If the yields to maturity on the two bonds change from 8% to 7.5%, ________.

Group of answer choicesboth bonds will decrease in value but Bond X will decrease more than Bond Y. both bonds will increase in value but Bond Y will increase more than Bond X. both bonds will decrease in value, but it is impossible to state which bond will decrease more. both bonds will increase in value but Bond X will increase more than Bond Y. both bonds will decrease in value but Bond Y will decrease more than Bond X.

Expert Solution

Generally higher maturity bonds OR lower coupon bonds are more sensitive to changes in interest rate.

Now here, the coupon rate is same, but Bond X has a higher maturity then Bond Y, so price of Bond X will change more than the change in price of Bond Y.

As YTM is falling, Price of Bond X will increase more than Bond Y

Answer : both bonds will increase in value but Bond X will increase more than Bond Y

we can also prove it by finding prices. I have atttached that also.

jeff jeffy answered 2 years ago

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