Question

Which of the following statements is CORRECT?

a. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant.

b. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.

c. 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.

d. 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.

e. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.

Write letter with answer next to it please

Answer 1

1. When the maturity of the bond is nearby, any change in interest rate is not going to affect much the value of the bond.When the the longer the time to maturity any change in interest rate would impact the bonds to the greatest possible extent.

This is such because interest rate affects the bonds according to their duration. Any fluctuation in interest rate will cause more volatility in long term bonds than short term bonds.

Zero coupon bond does not have any obligation of payment of coupon so it will highly dependent upon any change in interest rates.it is highly sensitive to change in the interest rates.

So the correct option would be option(C) 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

(C) is the correct answer.