Question

Consider these two bonds which are both newly issued and trading at par.

	Coupon Rate	Time Until Maturity
Bond A	7.5%	5 years
Bond B	7.5%	8 years

If the market interest rate unexpectedly changes from 9% to 11%, then both bonds will ________________ in value, but bond ____ will decrease more than bond _____.

decrease; A; B

decrease; B; A

increase; A; B

increase; B; A

Answer 1

When Market Interest rate increases, the Bonds price decreases as they are in Inverse relationship.

- If the market interest rate unexpectedly changes from 9% to 11%, then both bonds will Decrease in value.

But since, the Bond which have more time to maturity decrease more in value than the bond having less time to maturity.

Thus, Bond B will decrease more than Bond A

Hence, OpTion B. decrease; B; A

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