Asked by Radia Farid on May 02, 2024
Verified
Which of the following statement is incorrect if interest rates fall?
A) Bond prices will rise.
B) Coupon payments on floating rate bonds will fall.
C) The percentage price change for long-term bonds will be greater than for short-term bonds.
D) The percentage price change for low coupon bonds will be greater than for high coupon.
E) Coupon payments on floating rate bonds will rise.
Coupon Payments
Periodic interest payments made to bondholders during the life of the bond.
Floating Rate Bonds
Bonds that have variable interest rates, adjusting periodically in relation to an index or benchmark rate.
Interest Rates
The cost of borrowing money or the return for lending money, typically expressed as an annual percentage rate.
- Grasp the relationship between interest rates and bond prices, including how factors such as maturity, coupon rates, and yield to maturity affect bond valuation.
- Recognize the concept of interest rate risk and how bond features like maturity and coupon rates influence a bond's sensitivity to interest rate changes.
Verified Answer
ZK
Zybrea KnightMay 05, 2024
Final Answer :
E
Explanation :
When interest rates fall, coupon payments on floating rate bonds will also fall, not rise, because the coupon rates on these bonds adjust to reflect current interest rates.
Learning Objectives
- Grasp the relationship between interest rates and bond prices, including how factors such as maturity, coupon rates, and yield to maturity affect bond valuation.
- Recognize the concept of interest rate risk and how bond features like maturity and coupon rates influence a bond's sensitivity to interest rate changes.