Question
Assume that a 10-year bond has a 12 percent annual coupon, while a 15-year bond has an 8 percent annual coupon. The yield curve is
Assume that a 10-year bond has a 12 percent annual coupon, while a 15-year bond has an 8 percent annual coupon. The yield curve is flat; all bonds have a 10 percent yield to maturity.
The following are statements about these bonds:
I. The 10-year bond is selling at a discount, while the 15-year bond is selling at a premium.
II. The 10-year bond is selling at a premium, while the 15-year bond is selling at par.
III. If interest rates decline, the price of both bonds will increase, but the 15-year bond will have a larger percentage increase in price.
IV. If the yield to maturity on both bonds remains at 10 percent over the next year, the price of the 10-year bond will increase, but the price of the 15-year bond will fall.
V. If interest rates decline, the price of both bonds will increase, but the 10-year bond will have a larger percentage increase in price.
Which of the following is most correct about the statements above?
Select one:
a. Statement II is correct.
b. Statement III is correct.
c. Statement I is correct.
d. Statement V is correct.
e. Statements II and III are correct.
f. Statement IV is correct.
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