Which of the following statements is correct? a. You hold two bonds, a 10-year,

Question

Which of the following statements is correct?
a. 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.
b. 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.

Explanation / Answer

That would be A. The zero coupon bond receives the larger decline because of its lack of coupon payments.

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