Assume that all interest rates in the economy decline from 10% to 9%. Which of t

Question

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

A An 8-year bond with a 9% coupon.
B A 1-year bond with a 15% coupon.
C A 3-year bond with a 10% coupon.
D A 10-year zero coupon bond.
E A 10-year bond with a 10% coupon.

For purposes of the class discussion, support your answer. Remember that zero coupon bonds are sold at a steep discount. They then return to the investor the face value of the bonds. No interest is paid throughout the life of the bond. (That means instead of determining the present value of the principle and the interest payments, there is only the single payment to consider in the determination of its present value).

Explanation / Answer

D A 10-year zero coupon bond.

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