In comparing an 8-year bond to a 30-year bond issued at the same time with the s

Question

In comparing an 8-year bond to a 30-year bond issued at the same time with the same coupon rate, if the market interest rate has increased since the bonds were issued,

____

A)              The value of the 8-year bond will have increased more than the value of the 30-year bond

B)              The value of the 30-year bond will have increased more than the value of the 8-year bond

C)              The value of the 8-year bond will have decreased more than the value of the 30-year bond

D)             The value of the 30-year bond will have decreased more than the value of the 8-year bond

Explanation / Answer

Solution:-

Ans:-D)The value of the 30-year bond will have decreased more than the value of the 8-year bond

Explanations:-

There is the inverse relationship between the interest rate(Which is the required rate of interest) and the price of bond. Hence if the interest rate increase the price of bond will decrease not increase. Hence option (A)and (B) are incorrect.

When the interest rate changes the bond with higher maturity period will show more change in the price than shorter period due to the time value of money. The discount rate for the later period will be higher.

Hence the value of 30 year bond will have decreased more than the 8 year bond.

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