Which of the following statements is CORRECT? a You hold two bonds. One is a 10-

Question

Which of the following statements is CORRECT? a You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline. b The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. c You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. d The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates. e The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.

Explanation / Answer

You hold two bonds, a 10-year, zero-coupon bond and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.

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