Question

Which of the following statements is CORRECT? The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates. You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.

Answer 1

You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% yearly coupon. A similar market rate, 6%, applies to the two securities. In the event that the market rate increases from the present level, the zero coupon security will encounter the bigger rate decay. In this manner, the shorter the opportunity to development, the more prominent the adjustment in the estimation of a security because of a given change in financing costs.