Question

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT
A)If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.
B)If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price.
C)The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
D)The 10-year bond would sell at a premium, while the 15-year bond would sell at par.
E)If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall

Answer 1

Answer:

A)If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.

TRUE

As it has more time to maturity it will have a higher time expose to the rate therefore, will be more volatile against the rate fluctuations

Explanation:

The 10-year ond is issued at premium, above par as the coupon rate 12% is higher than market rate 10%. Each year will decrease the market value to come closer to maturity date.

The 15-year ond is issued at discount, below par as the coupon rate 8% is lower than market rate 10%. Each year will increase the market value to come closer to maturity date.