You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a

Question

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?
a.The price of Bond B will decrease over time, but the price of Bond A will increase over time
b. The prices of both bonds will remain unchanged
c. The price of Bond A will decrease over time, but the price of Bond B will increase over time
d. The prices of both bonds will increase by 7% per year
e. The prices of both bonds will increase over time, but the price of Bond A will increase by more

Explanation / Answer

The price of Bond A will decrease over time, but the price of Bond B will increase over time

Here, the Yield to Maturity (YTM) for both bonds is same and it is the market interest rate for both the bonds. Bond A

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