Final answer:
A one-percentage point decline in yield will have the most effect on the price of Bond A, which has a 5-year maturity, 12% coupon rate, and yield to maturity of 10%.
Step-by-step explanation:
When interest rates decline, the price of a bond generally increases. To determine which bond will be affected the most by a one-percentage point decline in yield, we need to calculate the bond prices using the given information.
a) Bond A has 5 years to maturity, a 12% coupon rate, and a yield to maturity of 10%. Using a bond pricing formula, the price of Bond A will be higher than its face value because the coupon rate is greater than the yield to maturity. Therefore, a one-percentage point decline in yield will have the most effect on the price of Bond A.
b) Bond B has 30 years to maturity, a 12% coupon rate, and a yield to maturity of 10%. The price of Bond B will also be higher than its face value because the coupon rate is greater than the yield to maturity. However, since the time to maturity is longer, the price sensitivity to changes in yield will be lower compared to Bond A.
c) Bond C has 30 years to maturity, a 3% coupon rate, and a yield to maturity of 10%. The price of Bond C will be lower than its face value because the coupon rate is lower than the yield to maturity. However, the price sensitivity to changes in yield will still be lower compared to Bond A.
Therefore, the one-percentage point decline in yield will have the most effect on the price of Bond A.