Register
A customer has purchased three different bonds, each yielding 9%, with 5 year, 10 year, and 15 year maturities. If prevailing interest rates drop by 20 basis points, which will show the greatest percentage
206k views
3 votes
A customer has purchased three different bonds, each yielding 9%, with 5 year, 10 year, and 15 year maturities. If prevailing interest rates drop by 20 basis points, which will show the greatest percentage price change?

User Cbeleites
by
4.9k points

1 Answer

3 votes

Answer:

The bond with 15 year maturity.

Step-by-step explanation:

The reason is that rate of percentage change in price of an investment with long term maturity will be faster than the rate of percentage change in price of an investment with a short term maturity as the interest rate changes.

This is because the longer the length of maturity, the greater is compounding effect. Therefore, when the interest rate drops, the price of the long term maturity will rise faster than the price of the short term maturity.

In this question's case, a 20 basis points drops in the interest rates will make the price of the bond with 15 year maturity to witness the greatest percentage change or rise in price.

I wish you the best.

User Muhammed Ozdogan
by
5.3k points
Ask a Question
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

5.7m questions

7.4m answers

Other Questions

_____ reminds customers and clients that they made a good choice in selecting a company with which to do business, or it reminds them of the good qualities of their purchase.​
On august 1 the darius co. purchased a photocopy machine for $8,000. the estimated annual depreciation on the machine is $1,680. if the company prepares annual financial statements on december 31, the
When president obama was elected, the u.s. economy was in trouble, and has slid into a recession. consumer spending was low and getting worse. in an effort to stop the decline, president obama proposed
Ensuring that an individual is who they claim to be is the function of _____. select one: a. confidentiality b. authorization c. availability d. authentication e. nonrepudiation
The current market price for good y is above the equilibrium price, and then the price of a subsitute good, x, increases. the demand curve for good y shifts as a result. what is the likely outcome of the
Link Copied!