Question

Consider two bonds, F and G. Both bonds presently are selling at their par value of $1,000. Each pays interest of $90 annually. Bond F will mature in 15 years while bond G will mature in 26 years. If the yields to maturity on the two bonds change from 9% to 10%, Group of answer choices both bonds will increase in value, but bond F will increase more than bond G. both bonds will increase in value, but bond G will increase more than bond F. both bonds will decrease in value, but bond F will decrease more than bond G. both bonds will decrease in value, but bond G will decrease more than bond F.

Answer 1

Answer:

Option D or the Last statement is the correct one.

Explanation:

As we can see, this is a multiple choice question with four options A, B , C , D.

And we are given two Bonds F and G.

Par Value of Both Bonds = $1000

Bond F Maturity = 15 Years

Bond G Maturity = 26 Years

Both Pays Interest = $90 Annually

Yield to Maturity Change from = 9% to 10%

So,

The correction option to this question is option D. The Last Statement.  

Option D = Both bonds will decrease in value, but bond G will decrease more than bond F.

Reasoning:

The reason behind this answer is related to number of years of maturity of the bond. There is a simple rule that, Longer the maturity, the greater the price change when interest rates changes. Similarly, Shorter the maturity, the shorter the price change when interest rates change. So, here in this case, Bond G has greater number of years of maturity which is 26 Years as compared to Bond F.