Asked by Matthew Mihatov on May 19, 2024
Verified
Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, ________.
A) both bonds will increase in value but bond A will increase more than bond B
B) both bonds will increase in value but bond B will increase more than bond A
C) both bonds will decrease in value but bond A will decrease more than bond B
D) both bonds will decrease in value but bond B will decrease more than bond A
Yields To Maturity
The total return anticipated on a bond if the bond is held until it matures, including all interest payments and the repayment of principal.
Par Value
The face value of a bond or stock as stated on the certificate or instrument, not necessarily its market value.
Mature
Refers to when a bond reaches its expiry date-payback or when a market or company has reached a state of equilibrium with little growth.
- Analyze how changes in yield to maturity affect bond prices.
Verified Answer
AB
Aldrouine BrenelusMay 25, 2024
Final Answer :
D
Explanation :
When yields to maturity increase, bond prices decrease. Bond B, with a longer maturity, will decrease more in value due to its longer duration, which makes it more sensitive to interest rate changes.
Learning Objectives
- Analyze how changes in yield to maturity affect bond prices.