15) Consider the following three bonds currently trading at Par Maturity (yrs) 1

Question

15) Consider the following three bonds currently trading at Par Maturity (yrs) 10 5 BondCoupon Rate 6% 6% 8% Relative to Bond C, for a 200 basis point decrease in the required rate of return, Bond B will most likely exhibit a(n): a) Equal percentage price change b) Greater percentage price change c) Smaller percentage price change d) Cannot be determined 16) For question 15, which bond will most likely experience the greatest percentage change in price if the market discount rates for all three bonds increase by 100 bps? a) Bond A Page 5

Explanation / Answer

15.

Correct answer:

B. Greater percentage price change

Explanation:

Since Bond B has lower coupon rate with respect to bond C though maturity period is same for both the bonds. Thus, bond B will be relatively more responsive to decrease in required rate of return. Thus, a greater percentage change in price will be shown.

18.

Correct Answer:

Explanation:

It is the put provision that gives right to the owners of bond that it can be sold back to the firm who have issued it.

If the issuer owns the right to buyback it is called call provision.

Pl. repost other unanswered questions for their answers!

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