Question

You are considering three different bonds for your portfolio. Each bond has a 10-year maturity and a yield to maturity of 10%. Bond X has an 12% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 8% annual coupon. Which of the following statements is CORRECT?
a.
Bond X has the greatest reinvestment rate risk.

b.
If market interest rates decline, all of the bonds will have an increase in price, and Bond X will have the largest percentage increase in price.

c.
If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.

d.
If market interest rates increase, Bond Z's price will increase, Bond X's price will decline, and Bond Y's price will remain the same.

e.
If the bonds' market interest rates remain at 10%, Bond X's price will be lower one year from now than it is today.

Answer 1

Answer:

The correct statement from the following options is (E) If the bonds' market interest rate remains at 10%, Bond X's price will be lower one year from now than it is today.

Explanation:

This is because bond X has the highest annual coupon percentage and a yield to maturity of 10%, so if the bonds' market interest remains unchanged, the bond's price one year from now will be lower than it is today.