Question

Assume that all interest rates in the economy increase from 9 percent to 10 percent. Which...

Assume that all interest rates in the economy increase from 9 percent to 10 percent. Which of the following bonds will have the SMALLEST percentage decrease in price?

a.

3 percent coupon, 3 year maturity
b.

30 percent coupon, 30 year maturity
c.

3 percent coupon, 30 year maturity
d.

30 percent coupon, 3 year maturity
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer: d. 30 percent coupon, 3 year maturity

Smallest percent decrease in price would happen for a bond that has smallest duration. Duration is directly proportional to years to maturity of a bond and inversely proportional to the coupon rate. Lower the duration, lower would be a bond's sensitivity to interest rate changes.

So, lowest duration would be for the bond with lowest term to maturity and highest coupon, which is the case for option D in question,

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Assume that all interest rates (i.e. discount rates) in the economy rise from 2% to 5%....
Assume that all interest rates (i.e. discount rates) in the economy rise from 2% to 5%. Which of the following bonds is the most sensitive to the change in interest rates? (Show the work leading to your answer) a. A 1-year bond with 10% coupon rate b. A 6-year bond with 5% coupon rate c. A 10-year zero-coupon bond d. A 20-year 5% coupon bond
Which of the following bonds has the highest interest rate risk? All bonds have the same...
Which of the following bonds has the highest interest rate risk? All bonds have the same face value and make annual coupon payments. A. 10-year bonds with 5% coupon rate B. 10-year bonds with 4% coupon rate C. 10-year bonds with 3% coupon rate D. 5-year bonds with 6% coupon rate E. 5-year bonds with 5% coupon rate The Grand Adventure has a 7-year, 6 percent annual coupon bond outstanding with a $1,000 par value. The bond has a yield...
1.A 12-year bond has a 9 percent annual coupon, a yield to maturity of 11.4 percent,...
1.A 12-year bond has a 9 percent annual coupon, a yield to maturity of 11.4 percent, and a face value of $1,000. What is the price of the bond? 2.You just purchased a $1,000 par value, 9-year, 7 percent annual coupon bond that pays interest on a semiannual basis. The bond sells for $920. What is the bond’s nominal yield to maturity? a.         7.28% b.         8.28% c.         9.60% d.         8.67% e.         4.13% f.          None of the above 3.A bond with...
True or false: If interest rates fall by 1%, a 10-year, 3% coupon bond will increase...
True or false: If interest rates fall by 1%, a 10-year, 3% coupon bond will increase in percentage of price less than an otherwise equivalent zero-coupon bond. The term structure of interest rates defines the relation between bond maturity and bond yield to maturity. Nominal interest rates tend to increase when the economy expands. A pension fund would probably prefer a municipal security with a yield of 2.5% to an equivalent corporate bond with a yield of 3%.
What is the approximate percent change in value of your portfolio if all (annual) interest rates...
What is the approximate percent change in value of your portfolio if all (annual) interest rates go down by two percentage points? What is the approximate change in dollar value of your portfolio if all (annual) interest rates go down by two percentage points? Your portfolio consists of one of each bond Bond A: Coupon rate = 10%, Maturity = 2, Price = 109.40, Duration = 1.82, Convexity = 4.34 Bond B: Coupon rate = 5%, Maturity = 5, Price...
The Cheltenham Company has a semi-annual coupon bond outstanding. A decrease in interest rates will have...
The Cheltenham Company has a semi-annual coupon bond outstanding. A decrease in interest rates will have which one of the following effects on the bond? A. decrease the coupon rate B. increase the coupon rate C. increase the time to maturity D. decrease the market price E. increase the market price
If the market interest rate rises from 8% to 9% this year, which of the following...
If the market interest rate rises from 8% to 9% this year, which of the following bonds will show the highest price sensitivity? - A 30-year bond, paying 8% annual coupon - A 30-year bond, deep discount bond (you may assume a zero-coupon bond) (Assume the face values are $1,000 for both coupon bond and the zero-coupon bond) Show that a deep discount bond will give higher risk than a coupon bond with same maturity.
1. Which of the following is the most likely to happen if interest rates (and thus...
1. Which of the following is the most likely to happen if interest rates (and thus bonds yields) were to go up? a. Bond prices would also increase. b. Bond coupon rates would decrease. c. Face value of bonds would also increase. d. Bond prices would go down. e. Nothing, since interest rates don't affect bond prices. 2. Which of the following is the correct description of a bond with a coupon rate of 5% and YTM of 4%? a....
Bond J is a 3 percent coupon bond. Bond K is a 9 percent coupon bond....
Bond J is a 3 percent coupon bond. Bond K is a 9 percent coupon bond. Both bonds have 7 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 5 percent, Bond K will decrease in price by ……………………. percent (enter 5.5% as 5.5 not 0.055, min 2 decimal accuracy)
Assuming all else is constant, which of the following statements is CORRECT? Answers: a. Price sensitivity...
Assuming all else is constant, which of the following statements is CORRECT? Answers: a. Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases. b. A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond. c. For any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a larger dollar capital gain than...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT