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In: Finance

If interest rates rise, bond prices will fall. Given the following pairs of bonds, indicate which...

If interest rates rise, bond prices will fall. Given the following pairs of bonds, indicate which bond’s price will experience the greater price decline.

a.)        Bond A           Coupon:10%

                                    Maturity: 5 years

            Bond B            Coupon: 6%

                                    Maturity: 5 years

b.)        Bond A           Coupon: 10 %

                                    Maturity: 7 years

            Bond B            Coupon: 10%

                                    Maturity: 15 years

c.)        Bond A           Coupon: 10%

                                    Maturity: 5 years

            Bond B            Coupon: 6%

                                    Maturity: 8 years

d.)        Bond A           Coupon: 10%

                                    Maturity: 1 year

            Bond B            Coupon: zero percent

                                    Maturity: 10 years

Solutions

Expert Solution

If interest rates rise, bond prices will fall.

a.)        Bond A           Coupon: 10%

                                    Maturity: 5 years

            Bond B            Coupon: 6%

                                    Maturity: 5 years

Bond B’s price will experience the greater price decline as the price of bond with lower coupon rate will decline more

b.)        Bond A           Coupon: 10 %

                                    Maturity: 7 years

            Bond B            Coupon: 10%

                                    Maturity: 15 years

Bond B’s price will experience the greater price decline as the price of bond with longer maturity period will decline more

c.)        Bond A           Coupon: 10%

                                    Maturity: 5 years

            Bond B            Coupon: 6%

                                    Maturity: 8 years

Bond B’s price will experience the greater price decline as the price of bond with lower coupon rate and longer maturity period will decline more

d.)        Bond A           Coupon: 10%

                                    Maturity: 1 year

            Bond B            Coupon: zero percent

                                    Maturity: 10 years

Bond B’s price will experience the greater price decline as the price of bond with lower coupon rate (zero) and longer maturity period will decline more

jeff jeffy answered 7 months ago
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