Question

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 BB. both bonds will increase in value but bond B will increase more than bond AC. both bonds will decrease in value but bond A will decrease more than bond BD. both bonds will decrease in value but bond B will decrease more than bond A

Answer 1

Answer:

D. Both bonds will decrease in value but bond B will decrease more than bond A.

Explanation:

A given bond is worth the same amount when it matures, so an increase in interest rates means that it must have a lower current value to grow to the same end value.

Comparably, bond B will grow more than bond A throughout its term, so the initial value decreases by more than bond A to compensate.