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 five years, while bond B will mature in eight years. If the yields to maturity on the two bonds change from 12% to 10%
a. Both bonds will decrease in value but bond B will decrease more than bond A
b. Both bonds will increase in value but bond B will increase more than bond A
c. Bond A will increase in value, but Bond B will decrease in value.
d. Both bonds will increase in value but bond B will increase more than bond A
e. Both bonds will increase in value but bond A will increase more than bond B

Answer 1

Answer:

The answer is "Option b"

Explanation:

The longer its maturity, therefore higher the rise in prices as the interest rate changes, therefore higher the value from both bonds, but bond B is greater than bond A.