Question

A ten-year T-bond has an eight percent coupon, and an eight-year T-bond has a ten percent coupon. These bonds are not callable and both have the same risk. If the yield to maturity (required rate of return) of both bonds increases by the same amount, which of the following statements would be CORRECT?

a) The prices of both bonds will decrease by the same amount.

b) The prices of both bonds would increase by the same amount.

c) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.

d) One bond's price would increase, while the other bond’s price would decrease.

Answer 1

The correct answer is c) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.

Step-by-step explanation:

In this situation, the bond with the longest time will suffer a greater decrease in its price due to the fact that for this, a greater amount of yield has been agreed upon its maturity taking into account that there is a greater investment risk. If there is a positive performance behavior, then for both bonds there will be a drop in their price.