Question

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 the capital loss stemming from a 1.0 percentage point increase in the interest rate.
	d. From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
	e. For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (r d) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.

Answer 1

The following statements is CORRECT :

ANSWER = e) For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (r _d) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.

The decline in price from an increase in rates is less than the gain in price from a similar interest rate decline. a percentage point increase in the market interest rate causes a larger dollar capital loss than the capital gain stemming from a percentage point decrease in the interest rate.