Asked by Bailey Rayoum on May 12, 2024
Verified
Suppose you are trying to price a bond. Which of the following is false?
A) The lower the discount rate, the more valuable the coupon payments are today.
B) Bonds with high coupon payments are generally (all else the same) more sensitive to changes in interest rates than bonds with lower coupon payments.
C) When market interest rates rise, bond prices will fall, all else the same.
D) Bonds with long maturities are generally (all else the same) more sensitive to changes in interest rates than bonds with shorter maturities.
E) All else the same, bonds with larger coupon payments will have a higher price today.
Coupon Payments
Regular interest payments made to the holders of a bond, typically paid semi-annually or annually, based on the bond's coupon rate.
Interest Rates
The amount charged by lenders as a percentage of the principal, or the amount earned on an investment over a specific period.
Bond Prices
The market price at which a bond is currently trading, influenced by factors such as interest rates, credit quality, and maturity date.
- Acquire knowledge on how bond prices, interest rates, and the responsiveness of bonds are interrelated.
Verified Answer
TR
Taylor RooneyMay 12, 2024
Final Answer :
B
Explanation :
B is false because bonds with lower coupon payments are generally more sensitive to changes in interest rates than bonds with higher coupon payments. This is because the present value of the lower coupon payments is more affected by changes in the discount rate.
Learning Objectives
- Acquire knowledge on how bond prices, interest rates, and the responsiveness of bonds are interrelated.