Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year Tre

Question

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year Treasury bond has an 8% annual coupon. Both Treasury securities have a 10% yield to maturity. Which of the following statements is most correct? A.  The 10-year bond is selling at a discount, while the 15-year bond is selling at a premium. B.  The 10-year bond is selling at a premium, while the 15-year bond is selling at par. C.  If interest rates decline, the price of both bonds will increase, but the 15-year bond will have a larger percentage increase in price. D.  If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond will increase, but the price of the 15-year bond will fall. E.  Statements c and d are correct. Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year Treasury bond has an 8% annual coupon. Both Treasury securities have a 10% yield to maturity. Which of the following statements is most correct? A.  The 10-year bond is selling at a discount, while the 15-year bond is selling at a premium. B.  The 10-year bond is selling at a premium, while the 15-year bond is selling at par. C.  If interest rates decline, the price of both bonds will increase, but the 15-year bond will have a larger percentage increase in price. D.  If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond will increase, but the price of the 15-year bond will fall. E.  Statements c and d are correct.

Explanation / Answer

The correct answer is C.

The reason is that the long term bonds prices of long term bonds are more volatile due to their high rish which comes form their longer durations. So in case of some favourable economic scenarios like interest rate drops, they offer higher incentives as compared to short term bonds. But when things becomes negative they become more painful that shorterm bonds.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.